Apart from macro-factors, one of the critical factors you consider while investing or trading in the equity and mutual funds market is the “Political Domain”.
As an intelligent investor, you keep a hawk’s eye on political events and act accordingly. The principal determinant of the political ecosystem is the elections, and markets get impacted by the results.
Market sentiments at that point decide if it will be bearish or bullish. Let’s explore how “Elections” impact the markets!
Before you take a plunge into the subject, comprehend what “market sentiments” represent.
It may be defined as the tone of the market or a common investor’s attitude towards an event, which may include a political event. The same can be understood as “crowd psychology” which gets reflected as:
Also termed as “Investor Sentiments”, even though they are not always based on business performance or fundamentals, it is critical for:
The reason for keeping an eye on market sentiments is to use the same to evaluate and earn short-term profits and to chalk out a long-term investment plan.
Past experiences of various elections have proven that they do impact the markets, and traders can earn or lose money.
Market sentiments show the following results elections are on, results are declared, and the formation of the new government.
Considering the historic political events and elections, combined with various other elements like global factors, it is evident that you need to go by the market sentiments and evaluate your financial goals to act accordingly.
There have been chances when election results were as per the market sentiments and Sensex rallied for some time to give you a promising return, but then by the next elections, the compound returns were disappointing.
The opposite of such also happened and investors received the unexpected. To better understand the impact of elections, let’s go back to past elections to appraise some.
The interesting trend observed, later, was the 50% downfall between April 2000 to October 2001 due to local events like scams and global factors like 9/11.
This is a pointer to highlight that the impacts of elections are usually short-term and they fast dissipate.
The market starts following the basic fundamentals very fast and works on the same until the next big event or elections.
The noticeable fact after the election is a steep rise in Sensex over a period of time, this time not because of the elections or market sentiments but due to the strong GDP growth and foreign investors’ flows in the Indian equity markets.
This was a repetition of what we saw during the last term of 1999-2004. Distinctly indicating that the impact of elections fast dissipates and the market depends on business performance and other fundamental elements.
There are important take-outs from the above historical elections and their results.
Similar trends were noticed during the Lok Sabha elections in 2009 when the election results were as per the market sentiments and the Sensex crossed the 20,000 mark.
The absolute returns observed during the term of the government from 2009-2014 were around 67%, but the annualized returns were near 8.7%.
However, there is another factor that also plays a critical role — the performance of the mutual fund, or in other words, determining how good or bad the mutual fund is.
To elaborate on this point, let’s consider a few cases:
The case study clearly shows that merely elections will not impact the market completely. There are good funds that will deliver high returns on their own capacities when invested in.
The above picture tells an amazing story of the power of a “Good fund”.
When the market had an absolute return of 150%, the mutual fund gave an absolute return of 239%.
When the market had annualized compound returns of 20%, the fund gave a 28% return during the same period. Therefore, it is clear that the competencies of the fund manager also play a big role.
To conclude the subject, elections do impact the equity markets and mutual fund markets, but time market sentiments change due to fundamental factors.
Hence, it is the investor’s research, knowledge, and wisdom to invest accordingly to gain maximum returns without allowing any influence on events like elections.
Disclaimer: The views expressed here are of the author and do not reflect those of Groww.