India-Pakistan conflict: How should mutual fund investors deal with geopolitical threats?

With the ongoing India-Pakistan conflict after the Indian Armed Forces' precision strike on terror camps in Pakistan and Pakistan-occupied Kashmir (PoK), the mutual fund investors are recommended to stay invested and avoid knee-jerk decisions, according to a release by Kotak Mutual Fund.

“It is difficult to predict the market direction however, the last major conflict has triggered temporary drawdowns before markets rebounded. Staying invested and avoiding knee-jerk decisions may be prudent for long-term wealth creation,” Said Kotak Mutual Fund.

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The fund house recommends that investors investing via SIP can consider topping up their ongoing SIP if possible, and should not exit from the existing SIP, whereas the investors making lumpsum investments may consider adding investments in a staggered way, and should not sell in panic.

While sharing how the current conflict could play out on the economy and markets, the fund house said that if it is a prolonged conflict then macro-economic variables such as inflation and fiscal deficit could increase, and markets may correct further.

On the other hand, if there is no conflict or a conflict for a limited period, the impact on the economy will be limited, and even the markets may stabilize.

There have been two such surgical strikes since 2016 (Uri and Balakot) and the impact on the market has been limited.

During the Uri Surgical Strike, which was between 18-28 September 2016, the market dropped by 0.3% from the day of the attack till the strike, and on the day of strike, it went up by 0.4%. One year after the strike, the markets surged by 11.3%, the release said.

At the time of the Balakot Airstrike, which was between 14-26 February 2019, the market went up by 0.8% from the day of the attack till the strike and on the day of the strike, it went down by 0.4%. One year after the strike, the markets surged by 8.9%.

“Government action suggests there is low possibility of a war. However, in case of a full-blown war, we must note that since 1950, India has seen 4 major wars. In the last major conflict (Kargil-1999), the equity markets have remained robust after an initial panic,” the release said.

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According to the release by Kotak Mutual Fund, at the time of Kargil War, which went on between 3 May to 26 July 1999, the market dropped by 8.3% just one month before the war and during the war, it surged 36.6%. After one year of the war, the market gained 29.4%.

“Short term market swings during geopolitical events are unsettling, but history shows that they rarely derail India’s long term growth story. In the long term, the macroeconomic factors and corporate earnings drive the stock market performance,” said the fund house.