Nov 24, 2018 8 min read

Recommended Mutual Fund Portfolios Based on Upcoming General Elections 2019

Historical Fact Files of Elections

Looking at the historical events, global elements, and elections, it is quite evident that one needs to go by the market sentiments and check the financial goals to act accordingly. There have been cases where the election results were as per the market sentiments, leading to rally in Sensex for some time, thus giving a promising return, but with the next election, the compounded returns went disappointingly. The opposite of the above-mentioned instance also happened, and that left investors with some unexpected returns.

To better understand the impact of elections on the market and especially, mutual fund investments, let’s travel back to the past elections to appraise some.

Lok Sabha Election(1999): In this year, the election outcome was in accordance with the market sentiments, and it was encouraging for them when the NDA won. Sensex, which was then sitting at 4,600 points raised sharply by around 6.5% (300 points). The rising trend followed the next three months and rallied over 20%, clearly showing the impact of the election outcome.

However, this soon took an unexpected twist when, later, 50%downfall was seen between April 2000 to October 2001 due to local events including scams and the incident of 9/11.

This instance highlights that the impacts of elections are usually short-term and they can fast dissipate. The markets start following the basic fundamentals very fast and work on the same until the next big event or elections.

Lok Sabha Election (2004): In this year, the market sentiments before the elections were towards a second term of the government. But, the results were disappointing, as the ruling party could not manage a victory, leading to a crash in Sensex. The consequences were so huge that within just three market sessions, the drop was seen to the extent of around 15% (700 points).

However, after the election, a steep rise was seen in the Sensex over a period of time, and it was all because of the strong GDP growth and foreign investors’ flows in the equity markets.

This was a repetition of what we saw during the last term of 1999-2004. Distinctly indicating that the impact of elections vanishes fast and the market depends on the businesses’ performance and other fundamental elements.

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Points to Enumerate

The important take-outs that one can take from the above-discussed instances are:

  1. During the period of 1999-2004, the absolute returns on Sensex during the 1999-2004 period was near 14 percent, whereas the compounded returns in the same period were 3% just. Although there were some twists and turns due to elections, the impact was short-term, yet impacting.
  2. In the second instance, during the period of 2004-2009, the absolute returns on Sensex were around 150%, despite that this duration witnessed the worst global recession. Also, the compounded returns were over 20%. These numbers are enough to attract any investor and astound them even after knowing that the same happened during the recession period and when the election result made the market to crash drastically.

Similar patterns were noticed during Lok Sabha Elections 2009 when the results were as per the market sentiments, and Sensex crossed 20,000 marks. The absolute returns during the term 2009-2014 were around 67%, but the annualized returns were around 8.7%.

Also Read: Impact of elections 2019 and its effect on mutual funds

Suggested Portfolios on Two Different Election Views

There can be two possible cases wherein the first one the present government repeats its term for the next five years, and in the second case where there is a formation of a new government. Let’s find out what can be the recommended portfolio in both the cases!

1. Another Term for the Present Government

If the current government repeats a term, then political stability can be seen in the market where both the market as well as the foreign investors will be seen enjoying the continuity. Political reforms which were made during the first term will take a new pace towards development. Undoubtedly, the current government has the ability to enact reforms which have long-term economic benefits.

This will give good growth to the cyclical stocks and such companies that are direct beneficiaries from the rise in the economic cycle. This states, aggressive investors who bet on cyclical stocks and mutual funds related to it will get the direct benefit from it.

Suggested Sectors to Invest in

  • It is recommended to go for the mutual funds whose portfolio combines sectors such as financial services, manufacturing units, and transportation and logistics.
  • Also, if there is economic growth which is certain, then it will directly push up the banks’ credit. The growth in credit amount can be seen as an outcome of a real rise in industrial activities and consumption sector.
  • An upsurge in the industrial activities can be seen, especially when the government resumes spending. A recovery in investment demand can further rise activities in different segments including capital goods, infrastructure, etc.
  • The suggested portfolio can be volatile in the near term as many of the segments are not running in the current trend. However, this can serve one better who has a long-term investment goal of 5 years or more.

Suggested Mutual Funds

5 Years10 Years
ICICI Pru. Banking & Financial Services Fund 22.62 22.93
ABSL Banking & Financial Services Fund N/A N/A
SBI Banking & Financial Services Fund N/A N/A
L&T Infrastructure Fund 23.07 14.46
Franklin Build India Fund 23.06 N/A
Invesco India Infrastructure Fund 18.9 13.38
UTI Transportation and Logistic Fund 23.15 26.69

2. Change in the Government

There can be uncertainty in case there is a formation of the new government as it might necessarily not help in the development pace of the economy. This would lead to uncertainty in the markets, especially till the time, there is a ray of clarity in politics.

Defensive stocks will be strong despite the market volatility; it will not see steep falls. Investing in them will help in managing losses in times of market volatility.

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Suggested Sectors to Invest in

  • A blend of consumer and MNC theme is suggested in this case. An increase in spending of the consumers can be seen on essentials, food, electronics, travel, cosmetics, and other related despite the government in power. These segments do not get much affected with change in the government policies, and thus whether inflation quite well.
  • Consumer companies are typically low dept which helps in the rising rate scenario. They have the ability to generate a high return on equity and have some visibility on earnings.
  • MNCs also tend to score well on business quality and governance. A large number of such companies have financial support from their parent companies working overseas.
  • This portfolio is build to be less volatile than the market. It has the ability to contain losses well if the market corrects and hasn’t shown any negative results in the past three years.

Suggested Mutual Funds

5 Years10 Years
Aditya Birla Sun Life Equity Fund 19.98 18.92
DSP Mid Cap Fund 22.42 23.35
ICICI Prudential Bluechip Fund 15.43 19.58
L&T Mid Cap Fund 25.81 23.72
Reliance Large Cap Fund 18.5 17.94

The Final Take

This is just an assumption of what both election results can bring and where an investor can bet his/her money. Further, these are lumpsum portfolios, however, making SIP investment as a follow up to your lump sum investment now can help you to ride out of volatility. The minimum investment tenure suggested with both the suggested portfolios is five years and more. To seek a personalized recommendation, connect with our experts now!

Want to clear out your doubts about regular mutual funds, mention your query here at here.

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