As the Lok Sabha elections 2024 approach, market volatility is likely to continue, leaving investors anxious about their portfolios. The political landscape significantly impacts market movements, with benchmark indices witnessing substantial fluctuations around election periods. Knowing how to navigate this volatility can help investors safeguard their investments and potentially capitalise on opportunities.
Here, we explore strategic approaches to investing during this dynamic period.
Historical context of market volatility during elections
Historically, Indian markets have exhibited notable volatility during election periods. Shlok Srivastav, Co-founder & COO of Appreciate, recounts the market’s reaction to the 2004 election results. “After the 2004 election results were declared, and the UPA alliance bagged a surprising victory, the stock market reacted negatively in the immediate aftermath. Market tumbled by 6 percent, the day after the elections and ended the month with a 10 per cent fall in May 2004. Indian markets ended that particular quarter with a manageable 5 per cent contraction. However, in the six-month and one-year period, markets bounced back with 10 percent and 19 per cent returns.”
This pattern highlights that while short-term reactions can be severe, the markets tend to recover and even thrive in the longer term. Hence, understanding and planning for such volatility can be crucial for investors.
Long-term investment strategies
For long-term investors, riding out the storm is often the best approach. Srivastav emphasises the importance of staying invested during these turbulent times. “Volatility from the polls is unlikely to stay a fixed macroeconomic narrative for long. Investors who are in the market for the long run are better off staying invested and braving the volatility which is likely to smoothen out in a couple of weeks, at worst.”
1. Diversification: A well-diversified portfolio can help mitigate risks. Spreading investments across various sectors and asset classes can reduce the impact of market fluctuations.
2. Focus on fundamentals: Investing in companies with strong fundamentals can provide a cushion against market swings. Look for businesses with robust balance sheets, consistent earnings growth, and competitive advantages in their industries.
3. Avoid panic selling: Knee-jerk reactions to market drops can lock in losses. Instead, focus on the long-term potential of your investments and resist the urge to sell in a panic.
Medium-term outlook and post-election strategies
As elections conclude and results become clear, markets often stabilise, driven by the election outcomes and underlying economic fundamentals. Anooshka Soham Bathwal, CEO & Founder of Dhanvesttor, notes, “As the major election factor will be out of the way in the next few trading sessions, markets will be driven by its outcome and fundamentals in the medium term.”
1. Build a strong portfolio: Bathwal recommends focusing on fundamentally sound companies, with a slight preference for large-cap stocks. These companies generally have more resilience against economic fluctuations and political changes.
2. Increase cash holdings: Conservative investors might consider holding more cash to be ready to redeploy after the election results. “A stable government in the centre and continuity of policies will be key factors to watch for such deployment,” says Bathwal.
3. Monitor policy directions: Post-election, government policies can have significant impacts on various sectors. Keep an eye on policy announcements and be ready to adjust your portfolio accordingly.
Investing during election periods can be challenging, but with the right strategies, it is possible to navigate the volatility successfully. Long-term investors should focus on maintaining a diversified, fundamentally strong portfolio and avoid panic selling.
As the election results settle, a focus on fundamentals and strategic cash redeployment can help position portfolios for future growth. By staying informed and flexible, investors can manage risks and take advantage of opportunities in this dynamic environment.
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Published: 01 Jun 2024, 11:47 AM IST