You could simply go ahead and invest in good quality funds or if you have a strong view on the outcome of the elections, then you can invest in an ‘Election portfolios’ consisting of a mix of theme funds.
Traditionally, the market turns volatile ahead of general elections. Historical data suggests investing ahead of elections can deliver superior results over the long term.
Now, if this is the case, where to invest?
You could simply go ahead and invest in good quality funds or if you have a strong view on the outcome of the elections, then you can invest in an ‘election portfolios’ consisting of a mix of thematic funds.
At FundsIndia we have built portfolios to suit your election views:
Portfolio 1: Another term for present government
If the current government continues for another term, it signals political stability. The market, as well as foreign investors, will cheer such continuity.
Reforms made so far will get the time to develop further. This government has also shown the ability to enact reforms which have long-term economic benefits.
Such a situation spells good news for 'cyclical' companies that are direct beneficiaries from an uptick in the economic cycle. Therefore, getting aggressive on such stocks will help ride this wave.
- This portfolio combines financial services, manufacturing activity, and transportation and logistics.
- The economic growth reflects in the bank credit. This credit growth stems both from a take-off in industrial activity as well as consumption. Banks and financial services are the biggest sectors in terms of stock market representation; a sustained market recovery usually involves financials.
- The nascent pick-up in industrial activity can gather pace, especially if the government resumes spending. A recovery in investment demand can further spur activity in sectors such as capital goods, infrastructure, and so on.
This portfolio can be volatile in the near term as many sectors in this segment are out of favour in the market. However, such a combination has generated superior returns over 5-year period.
Portfolio 2: New government or uncertainty
A new government does not necessarily spell gloom for the economy. But uncertainty can create volatility in stock markets until clarity emerges on policies.
A 'defensive' company is resilient despite market volatility or will not see steep falls. Investing in such companies can help limit volatility.
- Blends a consumer theme and an MNC theme. Consumers are likely to spend on essentials, food, cosmetics, electronics, travel and the likes regardless of the government in power. They derive strength from rural and urban regions, giving them a large market. They are not too influenced by government policies and tend to weather inflation reasonably well.
- Consumer companies are typically low-debt, helpful in a rising rate scenario. They also usually generate high return-on-equity and have some visibility on earnings. Markets tend to prefer such companies when the outlook is cloudy.
- MNC companies tend to score well on governance and business quality. Several have low debts and technological or financial support from their overseas parent. MNC funds have a relatively lower correlation with the broad market indices. MNCs are also spread across a variety of sectors, giving the theme a wide universe to work with.
This portfolio is built to be less volatile than the markets. Based on a historical rolling-return analysis over the past five years, this portfolio is excellent at containing losses if markets correct and has not shown any negative 3-year returns in the past, even if the broad market does.
Recommended mode of investment: These are lump sum portfolios. However, setting up SIPs as a follow up to lump sum investing will help ride out volatility. As with all equity portfolios, the minimum recommended time frame is 5 years.
The author is Head of MF Research – Fundsindia.com.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are her own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Not sure which mutual funds to buy? Download moneycontrol transact app to get personalised investment recommendations.