I am new to the stock market investment and just started reading books and online material including the discussion on this forum. I find it quite useful and helping me to learn.I have invested in few direct stocks and mutual funds, but thinking if following strategy can work in long term:
Its an improved SIP, calculating investment amount based on Nify P/E. Assuming that at lower P/E (e.g. 18.5) it’s a case of maximum possible investment and at higher P/E (e.g. 22.5) its a case of no investment.
Which means at P/E 20.5, you will invest 100% of dedicated money for that installment, at P/E 18.5 invest 200% and at P/E 22.5 invest 0%.
So the installment can be calculated from this formula:
(Highest P/E - (Current P/E))*Dedicated amount /(Highest P/E - Lowest P/E)
- Select 2 top rated funds as per the risk appetite.(Mid or multi cap in my case). There are many funds with a good return record of 20% + CAGR.
- Every monday/tuesday of the week calculate the installment based on above formula and current P/E and invest in one of the fund.
- On alternate week, invest in alternate funds.
Please note that highest P/E and lowest P/E can be decided based on individual’s choice/comfort.
Advantage from this strategy:
- Invest regularly purely based on market valuation.
- Always in monitoring mode, and always in buying mode, it could be possible that we donot buy, but every week is considered as buying opportunity.
- Since always in monitoring mode, it will give an opportunity of bulk purchase also. E.g. if the P/E is under 19, it could be considered as opportunity to buy in bulk.
- It looks bit of work, but it’s actually not. There is no need to analyse company stocks. Its just Nifty valuation and selection of funds. The primary job is not affected as it’s more of automated strategy.
Can the experts please review this strategy, if it can work in the favour ?
So the decision to invest or not is based on Nifty P/E ratio whereas your mutual funds may not have even a single nifty stock !!
You should find the weighted P/E ratio of your target fund and use that to decide whether to invest or not. This could be a good mechanical system to follow if you can stay the course. Also you should have some criteria to sell when P/E ratio reaches some high value and rebalance to debt funds.
Thanks Bhaskar for your inputs. I agree that it’s technically wrong to take decision based on Nifty P/E if the fund does not have significant representation from Nifty. I took Nifty P/E, as the information about Nifty P/E is relatively easily available and it has sentimental effects on market and Multicap funds atleast.
I will look for weighted P/E of the fund portfolio and see if I can follow this strategy. Also thanks for pointing out about the rebalancing portfolio at high P/E to transfer into debt funds. I also considered this but did not mention.
If putting into a fund, invest in the fund that charges really low expenses and covers as broad market as possible
Most of the time fees eat into profits and picking winning stocks is hit and miss and not dependent on calibre
Also dont look at the last 6-8 years as we were in the bull market after the crash of 2008/09
Markets on the whole are very overbought as of now, and will mostly move sideways for 6 months to a year. There will be better performing stocks but picking them is anyone’s guess at the moment
I think specially for a new investor, its good to wait out this bull market, every bull market has a bear market followed by a bull market. There is a saying, in a rising tide all ships rise. A tide can only rise so much. In a bull market generally you can pick almost any stock and it will rise. In a difficult overbought market its really down to a lot of work and even then the chances of getting wrong are high.
If you can buy something for Rs 100 why pay Rs 150 now. If you pay Rs 150 now it might temporarily go to Rs 200 but if a bear market comes it will come down to Rs 100
The current valuation of all stocks is very high. My suggestion is to wait a bit but its all down to personal tolerance for temporary loss. In 20 years all these good companies that are Rs 150 now will be Rs 2000 so it would not matter if you bought for Rs 100 or Rs 150 but in the short term if you are buying now dont panic and exit if a bear market comes and you lose 50% of the value.