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    Impact of Elections on Mutual Funds

    Sep 25, 2024
    5 min
    4 Rating

    Elections in any large democracy bring a period of volatility and uncertainty in the economy along with the financial markets. The recent elections are no different, and the market participants have observed anything that will affect investor sentiment and economic policies. As such, comprehending the potential effect of the election results on portfolios is necessary for making informed decisions for every mutual fund investor.

    This article will unravel the market sentiment towards mutual fund investments after the elections and whether it leads to short-term or long-term volatility or stability. One can further understand how important it is to stick to the fundamentals during the elections and how past mutual fund cases have performed in similar situations.

    Market Sentiment, Volatility, and Stability During the Elections

    Several previous experiences with elections prove that they affect markets, and investors can lose or earn money. Below are all the different ways the election affects the market sentiments and the mutual funds to an extent.

    • The market sentiments become bearish when the outcome of the elections is opposite the expectations.

    • Meanwhile, the sentiments become bullish when the election results meet expectations.

    • The fight between the bull and the bear begins sometime after the election, and the markets respond to the business performance and fundaments after that.

    Even when the market becomes volatile due to the outcome of the elections, the market mirrors corporate earnings growth in the long term. The short-term market reaction during this time can be sharp and unpredictable. In contrast, the long-term investment is tied more closely to the companies’ fundamental performance in which the mutual funds are invested.

    Committing to the Fundamentals During the Elections

    Mutual funds are long-term investments that are based on growth and fundamentals. Such a point underscores the significance of focusing on the businesses’ fundamental strength with the mutual fund portfolio instead of timing the market based on election outcomes.

    Past Cases of Mutual Funds’ Performance During Elections

    One can evaluate their financial goals and the performance of their mutual funds by considering the market sentiments. There have been times in the past when the election’s outcome was based on market sentiments, and Sensex provided a good return. Still, the returns had also become disappointing by the next elections.

    However, the opposite has also occurred sometimes when the investors have received the most unexpected. One can understand the impact of elections on the mutual funds' performance by considering the cases below.

    1999 - Markets Rally with NDA’s Stability

    The National Democratic Alliance, or the NDA, came to power in 1999. It was led by the BJP, and it brought forth a period of stability in the stock markets. The Sensex increased by 7% after the election’s outcome and continued to improve for the next few months . At this time, the economy also had strong GDP growth initially, irrespective of all the global events.

    Source: https://groww.in/blog/impact-elections-on-markets-mutual-funds

    2004 - A Shocked Market Due to UPA’s Unexpected Win

    The United Progressive Alliance (UPA) led by Congress, defined exit poll predictions in 2004. It leads to a market slump of 12.24% on the results day. But the market also rebounded to 8.3% the following day and had a high closure of 16% in the next five days.

    The UPA’s surprise win caused initial market turbulence. However, the markets recovered quickly, and the administration aimed for an 8% GDP growth with further economic reforms . The rise in GDP has a positive effect on mutual fund performance and returns since a turbulent market is not an ideal condition for any investment.

    Source: https://groww.in/blog/impact-elections-on-markets-mutual-funds

    Conclusion

    Market sentiments have always had an impact on the Sensex and the mutual fund's performance, but the effect remains short-term. So, if one considers investing in mutual funds for the long term, then one still has a chance of receiving positive returns. Before investing in anything before the election, it is necessary to do the needed research and gather all the knowledge to understand how the elections affect market events.

    When investing in mutual funds, it is important to comprehend what a good or bad fund is. For instance, a good fund is when the market recovers even after having a crash, and by the time the next election comes around, the Sensex stabilises as well. This does not impact the funds negatively and ensures that your investment has a higher absolute return than the market.

    Mutual Fund investments are subject to market risks, read all scheme related documents carefully.