Should you stay away from mutual funds till polls end?

Flows into equity mutual funds in April were the lowest in 31 months, according to Association of Mutual Funds in India. This indicates that investors are shy away from taking a plunge as they await the outcome of the general elections. In fact, inflows into equity schemes fell 60% in April to Rs 4,609 crore from Rs 11,576 crore in March.

However, inflows into systematic investment plans (SIPs) rose to Rs 8,238 crore as compared to Rs 8,055 crore in March. In the year-ago period, the inflows into SIPs were at Rs 6,990 crore.

Another factor keeping the investors on the edge are rating downgrades over the last two weeks, which have added to the fears of liquidity crisis affecting the companies. So in a situation like this, does it make sense to follow the herd and stay away from investing?

Swapnil Kendhe, a Sebi-registered investment advisor at vivektaru.com, says, "The only thing predictable about the market is that it is unpredictable. There's are always some or the other reason and people try to time the market. Now it's election outcome, next could be oil prices. The truth is no one can time the market. Any event can be a Black Swan event."

A Black Swan event is unpredictable to the observer and results in a severe and widespread consequence. After the occurrence of a black swan event, people will rationalise it as having been predictable (known as the hindsight bias), according to Nassim Nicholas Taleb, who wrote about the concept in his 2001 book Fooled by Randomness.

Kendhe says, "Retail investors' focus should always be a long-term goal. Those who are already invested via an SIP (systematic investment plan) should continue their investments. Even those who want to enter the market now should not wait for any event to occur. A systemic plan is more important than the noise in the market."

SIPs have been a popular term among the investors due to rupee cost averaging, which helps you buy more units when the market is low and less when the market is high, bringing down your average cost per unit.

Even amid the slow flow news, Amfi data shows that funds that invest in mid- and small-cap stocks contributed to a bulk of the month's inflow. This could possibly mean that even as retail investors are playing the wait-and-watch game, people who know a thing or two more about money are not shying away from investing.

Smart money and investments from high networth individuals are going into high risk-high rewards stocks like mid and small caps. Around June last year though, several mid and small-cap stocks had taken a huge beating due to the slowdown in equity on account of the corrective mood in the markets

Anant Ladha, founder of Invest Aaj For Kal and research head at Pankajladha.com says, "It was okay to wait and watch till February as the valuations were very high last year. However, valuations are in a comfortable zone right now. The correction which needed to happen has already happened."

If you trying to time the market according to headlines, you are clearly doing it wrong, as the market has the habit of over-reacting, even if it means with-holding investments. Ladha says, "Now is a good time to start investing again, if you had stopped. Remember, your investments should be based on asset allocation and financial goals."

As a retail investor, your primary goal is to stick to your financial plan to achieve your financial goals. Election results have hardly mattered when it comes to stock market returns. One way to map the post-poll possibilities is to see what happened earlier. Ladha says, "The electoral loss of the Vajpayee government (led by the then Prime Minister Atal Bihari Vajpayee) in mid of May 2004 resulted in volatility in the stock markets as the Sensex slipped. However, very soon not only the losses were recovered on Dalal Street, but the bulls also took complete charge of the Indian stock market. From the middle of 2004 till the beginning of 2008, markets were on a dream run, touching 21000, before the global financial meltdown happened."

In number terms, in May 2004, Sensex slipped from the level of 5400 on 13 May 2004 to about 4500 on 17th May after Vajpayee lost. In short, from a pure investment point of view, it may make more sense to be invested in the market rather than sitting out, especially via SIP.

ELECTION JITTERS

• Rs 4.6k cr – Inflows into equity mutual fund schemes in April this year
   
• 60% – Inflows fell in April from Rs 11,576 crore a month ago
   
• Rs 8,238 cr – Inflows into systematic investment plans in April