The Lok Sabha election between April 16 and May 13 comes amid a decline in the economy, expected to expand 7.1 per cent in fiscal 2008/09, the slowest pace in six years, with analysts predicting even slower growth next year.

Demand has slumped and exports have dipped sharply and a widening fiscal deficit has many investors worried.

Adding to the fund managers' concerns are doubts over the stability and composition of the new government, seen critical to fix the moderating economy, as allies of the two main coalitions bargain for more seats and as some old alliances fall apart.

In response, they are seeking safety in cash and cutting exposure to shares of medium and small-sized firms, seen as being more vulnerable to the market volatility expected before the new government takes oath by early June.

Until the elections end "it is a bit difficult for the market to really start moving up on a consistent basis," Srividhya Rajesh, vice president for equity funds at Sundaram BNP Paribas Asset Management said in an interview last week.

Her firm, an unit of BNP Paribas, holds a fifth of its stock fund assets in cash and sees no major trigger for actively buying stocks ahead of the election.

This concern is shared by many fund firms who have raised the average cash levels held by stock funds to a multi-year high of 18 per cent, at the end of February from about 14 per cent during the start of the year, according to data from fund tracker ICRA.

Allocation to relatively riskier mid- and small-cap stocks dropped to 31.43 per cent at end-February from 36.44 per cent during the start of the year.

Adding to these complexities is a burgeoning fiscal deficit, seen at 6 per cent of the gross domestic product in FY09, its highest since 2001/02, and sharply above the budget estimate of 2.5 per cent.

UNCERTAINTY

"Most of these portfolio managers are acting very conservative... they want to protect the downside," said Chintamani Dagade, a senior research analyst with the Indian arm of US fund research firm Morningstar, said.

Citing his interactions with domestic fund managers, he said "they are really uncertain" as they see a sharp downside risk ahead of the polls.

"It is certainly a big risk in this situation and they certainly don't want to bet on that," Dagade said. But he added that the jitters are limited to the short-term, and expects managers will resume taking long-term bets after the election.

"If you look at the current visible signals, they don't give you a lot of conviction," said Sanjay Sinha, chief executive of DBS Cholamandalam Asset Management.