Why investor should invest before 17th Lok Sabha result?

We studied the Nifty movement after the election results since 2004 to find out how Lok Sabha elections impact the market if an investor invests a day before counting of votes.

Apr 07, 2019 03:04 IST IIFL Derivative Desk Raushan Kumar |

The polling for electing members of the 17th Lok Sabha is about to begin in a few days. The country will take 39 days to vote and on May 23, we will get to the outcome. 
 
We studied the Nifty movement after the election results since 2004 to find out how Lok Sabha elections impact the market if an investor invests a day before counting of votes. For short-term reaction, we studied the movement of one, three and six months after the election results month to see the short-term reaction of the market to the polls. For any sustained reaction, we also studied the change in Nifty, one year after the elections.
2014: Election and Nifty Movement
Index/Fund Return 1 Month 3 Month 6 Month 1year 3 year 5 year Nature of Govt Largest Party Number of seats
NIFTY 5.88% 9.39% 17.78% 15.46% 9.86% 9.67% Majority, after1984 BJP 282
ELSS 10.57% 15.04% 35.26% 35.26% 19.61% 15.53%
Balanced Fund 6.56% 10.40% 18.48% 15.56% 10.02% 11.95%
2009: Election and Nifty Movement
Index/Fund Return 1 Month 3 Month 6 Month 1year 3 year 5 year Nature of Govt Largest Party Number of seats
NIFTY 22.12% 24.74% 36.15% 38.73% 10.42% 14.17% Coalition INC 145
ELSS 26.95% 33.66% 50.02% 61.04% 15.54% 17.74%
Balanced Fund 24.42% 27.26% 37.13% 40.18% 10.42% 14.46%
2004: Election and Nifty Movement
Index/Fund Return 1 Month 3 Month 6 Month 1year 3 year 5 year Nature of Govt Largest Party Number of seats
NIFTY -11.84% -5.23% 9.32% 16.06% 33.56% 16.56% Coalition INC 145
ELSS -9.17% 0.52% 18.75% 45.12% 37.73% 15.73%
Balanced Fund -10.78% -4.63% 9.11% 16.89% 33.38% 14.48%
 
As the above data shows, those who had invested a day before counting of votes, the returns are in double-digit. The maximum gain of Nifty was 39%, which was made in the 2009 election and the next highest return was in 2004. Further, the Mutual fund maximum gain of 61% was made in 2009.
 
Investing strategy
A direct equity investor can adopt a bottom-up approach to picking large Midcaps that have declined in recent times and buy stocks with "high positive skewness and low kurtosis" with a low coefficient of variation.
 
Also, staggered buying through mutual fund SIP route appears the safest. Lump-sum buying can be done once there is clarity on the election outcome.
 
Derivative strategy
Traders or investors can use "Strap option strategy and Put hedge strategy" with a LEAP year option contract.  
 
Remarks
Stocks buying and derivative strategy essentially requires discipline and knowledge to generate Alpha returns. And we provide customized strategies as per investor risk management to generate regular income. In fact, we have advanced and innovative strategies, which have almost zero risk, but these strategies are only for "Richer investors".  

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