Written by Sudeep Mandal, Vice President, DSP Mutual Fund:
Is this right time to invest? The Indian stock market reached an important milestone this week, with the NSE Nifty crossing the 20,000 mark. This achievement made headlines and may inspire you to jump into the market. But, it’s important to ask: is this the right time to invest? Let us understand this topic in simple words.
First, it is important to understand that the number of 20,000 is temporary. The stock market is always changing, numbers are constantly going up and down. Importantly, this is not the highest point the market will ever reach. Throughout history, we have seen peaks, and there will be even bigger peaks in the future.
So, what should investors do now? Instead of focusing on this specific number, it’s wise to think about market value. A common tool for this is the price-to-earnings (P/E) ratio, which compares a stock’s price to its earnings per share.
Looking at the last decade of Nifty 50’s P/E ratio (barring extreme events like COVID-19), we have seen it range from 17 to 25 with an average of around 20. Currently, the P/E ratio of the Nifty 50 index stands at 22-23, which is considered high compared to its historical levels.
When valuations are high, it tells us two important things. First, many positive expectations for the future are already factored into market prices. Second, there is less protection for investors entering at these high levels because unexpected bad news could cause prices to fall.
Although there is a long-term relationship between economic growth and markets, they do not move in lockstep. Sometimes one lags behind the other. When the market moves up, future returns may not be as strong. Statistically, when the P/E ratio goes above 22, Nifty 50 has lower returns over the next three years.
For those who prefer to invest when valuations are low, the current situation may seem less ideal. But, there are smart ways to deal with this phase. There are two approaches here:
Auto-pilot investing with hybrid or multi-asset funds: These allow fund managers to adjust their investments between different assets such as stocks, bonds and gold. When stocks become more attractive in the future, they may move your investments accordingly. This strategy provides diversification and professional management to minimize market risks.
Long Term Investing with Systematic Investment Plans (SIP): Consider spreading your investments over time using SIP or STP (Systematic Transfer Plan). It means investing a fixed amount at regular intervals, which can smooth out market fluctuations. This is a safer approach than trying to time the market.
For existing investors with ongoing SIPs, focus on your financial goals rather than reacting to index numbers. Evaluate how close you are to your objectives. If you don’t need your money immediately and you have time to reach your financial goals, sticking with your SIP is generally a wise move.
Finally, if you are thinking of starting a SIP, go ahead without worrying too much about the index number. Be cautious with lump sum investments, as short to medium term returns can be volatile. In such cases, consider sequential entry through STP. Otherwise, opt for multi-asset or auto-allocation funds that adjust the mix of stocks and bonds based on market conditions. Remember, investing is a journey, not a one-time event, and thoughtful strategies can help you make the most of it.
(The author is Vice President and Head of Distributor Marketing, DSP Mutual Fund)
Disclaimer: The views expressed above are personal opinions. The information provided in this article is for informational purposes only and should not be considered financial advice. It is recommended to consult a qualified financial professional and tax advisor before making any investment or financial decisions. Mutual fund investments are subject to market risks, and it is important to read all scheme-related documents carefully.