Wednesday, 21 May 2014

How Election Results can Impact Your Investment Portfolio

It was indeed a remarkable and historic moment for any political entity to have such a massive victory.

I would hereby give my view on the Impact of such results on an Individual's Portfolio.

Although, Returns from Investments are a function of Time Horizon and Risk appetite, certain other macro economic factors would definitely have an impact on an Individuals Portfolio. Election results are also one of the factors that would set the ball rolling in the economy.

With a stable government and more to say, a majority stake holder in the Parliament, we could have the impact as follows:

Impact on Debt Investments:

Even before the formation of the new government, the prospective PM has given a direction that this is a Government of the poor, by the poor and for the poor. Which could possibly mean that concrete steps will by taken in order to control 'Inflation' - the biggest worry of the RBI and the people of our country at Large. So, we can hope for active steps being taken in the direction of reducing Inflation.

If successfully achieved, which can be expected from the new government, than interest rates can be expected to come down within a period of 6 - 12 months. Once, interest rates have come down, the returns from any investment done for a short term investment horizon and invested in Debt Instruments like Bonds, Debt Funds, for a period of 1 - 3 years can give satisfactory returns from such instruments ranging from 8% to 12 %.

Impact on Equity Investments:

The very fact that the previous government has been removed by the people and an opportunity has been given to the new Face of India, proves that people were fed up of absolute policy paralysis, logjam at all stages of necessary reforms and unwillingness of the people having power to work for the betterment of the economy.

High hopes of reforms and immediate reforms would put pressure on the new government to put the economy on growth track at earliest possible. hence, corporates earnings are expected to improve, fresh investments are expected to flow and economy is expected to grow. 

The result should translate into good corporate profits and eventually better valuations of the companies boosting the equity of such companies. If investment done for a longer term investment horizon say for 5 - 7 years in Equity shares or Equity mutual funds, then better than expected returns will flow.
Could be a surprise, but returns could be as high as 20 %