Where to Invest in Stock Market when Political developments impact market?
The markets prefer a strong, stable regime without the crutches of coalition because it ensures continuity in economic policies. Investors now have political stability and predictability of economic policies, which they normally look forward to before investing with a long-term time horizon. The clear mandate removes the overhang of uncertainty from the markets. This is a significant positive for market sentiment and for attracting global investors.
The S&P BSE Sensex rallied over 950 points to hit 40,000 and the Nifty50 broke above its previous record high of 11,883 to touch a record high of 12,000 as early trends indicate a majority for the NDA.
Domestic consumption will remain the cornerstone of investments in Indian Markets. Consumption, select financials, oil marketing companies, and niche engineering companies remain the best bet in the market.
Though volatility is part of the stock markets, it does not last forever. The markets factor in major events like the Lok Sabha elections but eventually go back to their normal functioning.
- Analysts say investors who have an appetite for risk and can digest volatility should stay invested. While the election outcome can trigger a knee-jerk reaction in the short-run, the medium-to-long term trajectory will be decided by corporate earnings and other global / local developments. For those seeking a safer option, hedging exposure or exiting the markets will be a prudent strategy.
- A prudent approach would be to hedge the existing market position or trim exposure to high beta sectors like non-banking financial companies (NBFCs) and others. A BJP-led government will be seen as a stable government that is likely to focus on capacity creation through infrastructure development. Cement companies and corporate banks like ICICI Bank, Axis Bank are good stocks to focus on.
- Strong view would be to align to new growth focus areas for the new government such as housing, credit penetration, tourism, healthcare for all and watch out for the nascent recovery in the Investment cycle. A natural corollary to that will be to buy banks, real estate, cement, healthcare and the hospitality sector.
- PSU and capital goods have done well historically during elections on hopes of better policy mechanism post government formation and can be considered for investment.
- The traditional performing sectors – banks and fast moving consumer goods (FMCG) – could also do well. However, given high valuations of the stocks in these two segments, one should be careful in increasing exposure to them now.
What Investors should do?
The following are some important investment tips to help you make rational and prudent decisions in the current market situation:
1. Stay on Long-Term Financial Goals
The ups and downs in the stock market will continue, and you must not deter from your long-term financial planning due to market volatility. It’s important to stay invested and sync the investment portfolio as per your financial goal. You must not become greedy and rush towards putting all your money in the stock market in expectation of higher return.
2. Continue SIP Investment
Some investors believe that when the stock market trades at highs, they’ll get a lesser number of units in the mutual fund equity SIP; therefore, they stop further investment. It is important to understand here that the Systematic Investment Plan is one of the best tools that provide you with the benefit of rupee cost averaging. So, when the stock market is up, you’ll get a lesser number of units, but when the market is down, and then you’ll get a greater number of mutual fund units. Therefore, it ensures that despite a volatile market, you earn a good return. So, don’t stop SIPs and invest consistently to get to your financial goals.
3. Rebalance your Investment Portfolio
With share prices touching new highs, you may want to rebalance your investment portfolio and maintain the correct ratio between debt and equity assets according to your return expectations and your financial goals’ demands. Suppose, as per your risk appetite and return requirement, the debt to equity ratio of the portfolio is 60:40, but the price of the equity portion has increased significantly. Now, your portfolio stands skewed towards equity with a ratio of 20:80. So, you’ll be well-advised to book profit in equity products and increase allocation in the debt portion to rebalance your investment portfolio.
4. Mind your Risk
It’s important to re-evaluate your risk appetite from time to time. Currently, the stock market is highly sentiment driven, and it may turn volatile anytime. If you are not in a position to take a high risk on investments, you can shift your equity-related investments to other avenues such as debt fund or fixed deposits. At the same time, it is critical that you steer clear of rumors. Take informed investment decisions to avoid unnecessary losses.
5. Diversify Adequately
Though the stock market is making new highs due to high political sentiment, it’s recommended to keep your investment portfolio adequately diversified in different asset classes. It will protect your portfolio when the market turns negative. While diversifying investments, keep your age, risk appetite, and financial goals in mind. If you are young, then you can have higher exposure in the equity market in comparison to the debt market, but if you are close to retirement, then focus on debt investment to keep the risk factor lower.
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