Every time a big election comes around, at the centre or in a large state, the same questions come up. Will the market crash if the result is unexpected? Should I stop my SIP until the result is out? Should I invest a lump sum before or after? It's natural to worry. Elections feel important, and news channels make them feel even more so. But for long-term investors, elections usually matter far less than they seem. Here's why markets get jumpy, what tends to happen, and what to actually do.
Why markets react to elections
It's simple, really. Markets dislike uncertainty. Before an election, investors don't know which government will form, what its priorities will be, or how stable it will be. Some investors wait on the sidelines. Others bet on one outcome. That can make prices swing more than usual in the weeks before and right after the result.
Our page on India VIX explains how this nervousness shows up as a rise in expected volatility.
The result-day swing
On counting day, markets can move sharply, sometimes up, sometimes down, depending on whether the result matched expectations. A surprise often causes a bigger reaction than an expected outcome, because prices hadn't already adjusted for it.
These swings can be dramatic for a day or two. Then, usually, attention shifts back to the things that matter more over time: company profits, interest rates and the wider economy.
What matters more than the result
Over the long run, share prices tend to follow company earnings. Earnings depend on demand, costs, interest rates, global conditions and countless business decisions. A government can influence some of these, but no single election decides them all. India's economy and markets have grown through governments of many different kinds.
Our page on how the stock market works explains what really drives prices over time.
Should I stop my SIP before an election?
Short answer: no. A SIP is designed to keep buying through all kinds of conditions, including uncertain ones. If the market falls after a result, your SIP buys more units at lower prices. If it rises, your existing units benefit. Stopping and restarting means guessing twice, and most people guess wrong at least once.
Our page on what to do with your SIP when markets fall explains why consistency wins.
What about a lump sum?
If you have a large amount to invest and you're worried about election swings, you don't need to bet on the result. Spread the money over several months through an STP. Some of it will go in before, some after, and you won't have to guess.
Our page on STP explains how to set this up.
Should I sell before the result?
Selling long-term investments to avoid a possible fall is a form of market timing. You'd need to be right about the result, right about how the market reacts, and right about when to buy back. That's three correct guesses in a row. It's very hard to do, and you may also pay tax and exit loads along the way.
Our page on the best time to start a SIP explains why timing rarely works.
Money you need soon is different
If you need some money within the next year or two, for a wedding, fees or a down payment, it shouldn't be in equity anyway, election or no election. If it is, consider moving it to steadier funds. That protects you from any kind of fall, not just an election-related one.
Our page on short-term investment options explains where to keep it.
Sector moves after elections
Sometimes particular sectors rise or fall after a result, based on what investors expect from the new government, such as infrastructure, defence or rural spending. These moves can be sharp but often fade. Chasing sectors based on election themes is risky.
Our page on sectoral and thematic funds explains why concentrated bets can disappoint.
What past elections suggest
Looking back at many elections, the pattern has often been similar: nervousness before, a swing on result day, and then the market returning to its longer-term path driven by earnings and the economy. This isn't a promise about the next election. But it's a useful reminder that the day-one reaction is rarely the whole story.
Keep a sensible mix
A portfolio with a mix of equity, debt and some gold usually feels less dramatic during any event, including elections. If you find yourself very anxious, it may be a sign your equity share is higher than you're truly comfortable with.
Our page on asset allocation explains how to set a mix you can live with. A mix that lets you sleep on result night is worth far more than one that looks perfect on paper.
What about after the result?
Once the result is out and the first few days of excitement pass, many investors wonder whether to "adjust" their portfolio to suit the new government, buying sectors expected to benefit and selling others, which sounds clever but usually means paying costs and taxes to make bets that may or may not work out over the following years. For most families, the best post-election move is the same as the pre-election one. Carry on.
Ignore the noise
Election coverage is designed to keep you watching. Exit polls, predictions and expert panels all add excitement, but very little that helps your plan for the years ahead. Turn off the channel. Check your goals instead.
Our post on the yearly money checklist is a far better use of that evening, and it will still be useful long after the election is forgotten.
A simple example
Imagine two investors with the same SIP. Before a big election, one stops the SIP to "wait and see". The result surprises the market, and prices fall sharply for a few days. The investor who stopped feels relieved. The other keeps going, buying units at the lower prices. A few months later, attention has moved on to company results and interest rates, and the market has recovered. The first investor restarts the SIP at higher prices, having missed the dip entirely. This is an illustration of behaviour, not a forecast.
State elections and global events
State elections, elections in other large economies and other political events can also cause short bursts of volatility. The same principles apply. Plans built around your goals shouldn't change because of a single political event, wherever it happens.
Our page on recession and your investments covers how to think about bigger economic worries too.
A simple election checklist
- Keep SIPs running.
- Make sure money needed soon isn't in equity.
- Spread any lump sum through an STP.
- Don't sell long-term holdings to "wait for clarity".
- Avoid election-themed sector bets.
- Check that your emergency fund is in place.
The bottom line
Elections can move markets for a few days or weeks. They rarely change what a long-term investor should do. Keep investing regularly, keep near-term money safe, and let the headlines pass. Years from now, the result-day swing will barely show on your chart.
If election worries are making you second-guess your plan, I'm happy to talk it through. Myfolios is an AMFI-registered mutual fund distributor (ARN-145870) working from Indore since 2014. Get in touch.
