Should your mutual fund investment strategy be really impacted by the elections? From a financial planning perspective, your SIPs are unlikely to see any great impact due to the elections. After all, these are long term SIPs and are likely to be driven by larger asset allocation considerations rather than by election related volatility. That is your core mutual fund portfolio, which has its own in-built defences. There is also a regular rebalancing done on a periodic basis to your core mutual fund portfolio based on a structured review format.
What we are focusing on more is the flexible mutual fund portfolio wherein you look for opportunities in the short to medium term. Here you buy / sell funds to make the best of shifts in market conditions. In this case, some tweaks will be required and here is how you should go about it.
How about your equity funds?
One of the basic types of funds to be cautious around election time is the mid cap and small cap funds. These funds are, by default, riskier than large cap funds. However, there is a caveat. If you have a long term perspective of 5 years and beyond or if you are investing through SIPs, then the impact of election volatility may not be significant. In case you want to diversify your size risk you also have the option of multi-cap funds instead of large cap funds but stay as diversified as possible. Ensure to keep sufficient liquidity available to tap opportunities that may arise post the elections. We shall explain this point in detail later.
Our take on sectoral and thematic funds
Should you look at sectoral and thematic funds at all around election time? While sector/thematic funds run concentration risk, you can allocate some money to sectors that are either less vulnerable or immune to the outcome of elections. For example, consumer stories like FMCG and consumer durables have little by way of political import. They are based on growing income levels in India and that is likely to continue irrespective of which government comes to power. You can look at a small allocation to sectoral funds contingent on consumer demand or rural demand. Both these segments are likely to get adequate attention, irrespective of who forms the government.
How to approach debt funds in this market?
The basic rule is to avoid credit opportunities funds for the time being. There are a number of reasons. Firstly, many of these companies may be politically sensitive and that could impact their viability. Secondly, these credit opportunity funds are likely to be more volatile around elections, especially where the portfolio is concentrated and also vulnerable. A better thing to do would be to play it safe with short term funds (STF) till the election fever is done and dusted. Then you can take a view on inflation and interest rates.
What are the liquid funds to prefer around election time?
You hold liquid funds around election time for a simple reason. You want to be liquid enough post elections to tap opportunities in the emerging order. You have a choice between liquid fund and liquid plus funds for higher returns. If your focus is pure liquidity, it is best to stick to liquid funds. You need to be able to capitalize on the opportunities post elections without any additional costs. As a proxy for liquidity, best stick to liquid funds.
There is an interesting question that people tend to ask. In case someone is going to start financial planning, should they start right away or wait for the election outcome. While we are not worried about the nature of government, the new government could have a different perspective on investments, taxation and savings. All these can impact your asset mix. In case you are just about starting out on your financial plan, it may be wise enough to wait out the elections. After all, we are just talking about less than a month more!