What Happens to Indian Stocks Before General Elections?

The financial markets are unpredictable, influenced by a whirlwind of factors – from company earnings to geopolitical tensions. 

However, certain events, like General Elections, tend to nudge the markets in a particular direction. Today, we'll delve into how Indian stocks have behaved historically leading up to the General Elections and explore smart investment strategies for the long haul.

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Understanding Historical Trends

India holds General Elections every five years, and these events can stir the stock market pot. Based on past elections, we have analyzed how the stock markets have behaved in the 6 month run up to the General Election results. 

To do this, we analyzed data from the General Elections of 1999 when the NDA won and Mr. Vajpayee became the Prime Minister of India.

The SENSEX was at 4,697 on the result day on 6 Oct, 1999. But 6 months prior to it, the SENSEX was at 4,042. So, the market rallied about 17% during the 6 month run up to the General Elections 1999 result day.

If we graph the SENSEX’s returns over all such 6 month periods prior to the General Election results since 1999, we get the following:

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This trend seems to hold weight. Analyzing the SENSEX's performance in the six-month window before each General Election result since 1999 reveals a consistent pattern – the market has typically witnessed a 10-30% rally during this period.

Howard Marks, one of the most successful investors of all time, has said that the following Mark Twain quote fits very well with financial markets - 

History doesn’t repeat itself, but it often rhymes.

So, if history is anything to go by, it looks likely that the Indian stock market is gearing up for a big rally as we approach the result day of the General Elections 2024.

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Should You Invest All Your Cash in Indian Stocks?

Tempting as it may be to interpret this as a guaranteed upswing for 2024, a word of caution is necessary. 

Financial markets are unpredictable because they are influenced by so many factors that just can’t be factored in.

The 1999 election result run-up rally can also be attributed to the end of the Kargil War. 

The 2009 election result run-up rally can also be attributed to the global financial market recovery after the 2008 financial crisis.

So, the end of war in 1999 and the global market recovery in 2009 probably played bigger roles than the election results in the market rallies. And, there were definitely other factors at play too.

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Power of Long-Term Investing

Markets are especially unpredictable in the short term, but as you extend the time frame, it seems like they. Always. Go. Up!

Here, we calculated the returns of all possible 1, 3, 5 and 10-year periods of the SENSEX and took their average (also known as average rolling return). We got the following:

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As you can see, staying invested longer is a simple way to reduce the probability of losing money in the market. 

It also means that the chance of earning a 12%+ return goes up as you stay invested for longer.

So, instead of looking at markets over 6 months, general elections or not, the focus should be on staying invested longer.

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Disciplined Investing

Long-term investing requires discipline – resisting the urge to panic-sell during market dips or chase quick profits when things are rosy. 

Systematic Investment Plans (SIPs) can help you stay disciplined. They offer a structured framework allowing you to contribute regularly irrespective of market conditions. 

By investing a fixed amount regularly (often monthly), SIPs average out the cost of your investments, allowing you to buy more units when the market is low and fewer when it's high. 

This promotes a disciplined approach, shifting your focus from short-term fluctuations to consistent long-term wealth creation.

Start your SIPs today and invest in top mutual funds with iNRI. Leverage iNRI’s Smart Investing Tool and curate a portfolio that matches your investment needs.

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Conclusion

The behaviour of the Indian stock market before the General Elections reflects a complex interplay of historical precedent, economic dynamics, and investor sentiment. 

While historical trends may offer valuable insights, they should be interpreted cautiously, considering the multitude of factors influencing market movements. 

Adopting long-term investment strategies, coupled with disciplined investing practices, is important for navigating the intricacies of the financial markets and achieving sustained growth.

NRIs seeking to participate in India's growth story can invest in mutual funds. iNRI simplifies the process of investing in Indian mutual funds for NRIs. You can now invest in Indian mutual funds from the comfort of your home - 100% online investing. 

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