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INVEST-O-METER

Invest-O-Meter

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Current Nifty P/E : 25.69
(Last Updated on Date : 16-11-2018)

All of us are fascinated about equity investments. For some, it had been a money minting machine but for rest it has been a worst investment experience of their life. Each one of us thinks that we can best judge the market valuations and make money out of it. But how many of us could really do this!!!

How about having a tool that will guide you as to what part of your equity allocation should actually be invested at prevalent valuations?

Amongst all the asset classes, decision to equity allocation should carry highest importance as equity markets have wild fluctuations and also has potential to substantially change the performance of the entire portfolio. Once the decision on the equity allocation has been finalized, it does not necessarily mean that the entire investible amount should be invested at existing level. It is important to evaluate what part of this fund should be invested immediately and also draw a roadmap for investing balance funds. Current equity valuations and future outlook plays an important role in deciding this. One may have to wait for more compelling valuations to invest the balance amount.

Based on the PE ratio of the index, we have developed a model with empirical evidence that guides us as to what would be prudent exposure to equity at given valuation

Nifty P/E Band <12
Probability Time(%) 2%
3 years mean rolling returns 39%
Indication Buying Time
Nifty P/E Band 12-14
Probability Time(%) 10%
3 years mean rolling returns 30%
Indication Buying Time
Nifty P/E Band 14-16
Probability Time(%)18%
3 years mean rolling returns 27%
Indication Buying Time
Nifty P/E Band 16-18
Probability Time(%) 16%
3 years mean rolling returns15%
Indication Hold
Nifty P/E Band 18-20
Probability Time(%) 20%
3 years mean rolling returns 11%
Indication Hold
Nifty P/E Band 20-22
Probability Time(%) 19%
3 years mean rolling returns 6%
Indication Selling Time
Nifty P/E Band 22-24
Probability Time(%) 9%
3 years mean rolling returns 1%
Indication Selling Time
Nifty P/E Band 24>
Probability Time(%) 5%
3 years mean rolling returns -5%
Indication Selling Time

On analyzing the above data, it is evident that markets have delivered excellent returns when investments are made below PE ratio of 18. Returns get deteriorated as we move above PE ratio of 18.

On the basis of this table, we have designed invest-o-meter that can guide us as to what part of the total equity allocation should actually remain invested in the market. Invest-o-meter is updated on a daily basis for latest index level, PE ratio and change in equity allocation. By adhering to dynamic equity allocation, the portfolio’s risk can be brought down substantially and the return can be improved by 5-7% over longer period of time.

It is important remain disciplined for a longer period of time to take best benefit of the above study. You can subscribe to our R. Wadiwala Agile P/E Ratio Portfolio under PMS & Advisory Services to take benefit of the tactical equity allocation and get the best out of your equity investments.