Investing Based on Nifty P/E < 20 and Exiting > 22

Investing Strategies
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I’ve been working on a simple backtest using historical Nifty 50 PE data starting from 2006 to evaluate a valuation based investment strategy. The idea is straightforward: invest in the Nifty when the trailing PE falls below 20, and move to liquid funds when the PE rises above 22. During times when the market is considered overvalued (PE > 22), the capital is parked in liquid instruments.

This is a rule based strategy either fully invested in Nifty or fully in liquid funds. No averaging down is done, even during sharp corrections like in 2008 or 2020. For example, if the investor entered at a P/E of 19.6, they would remain invested regardless of further declines, instead of trying to catch the bottom.

The objective is to compare this approach with a simple buy and hold investment in the Nifty over the same time period. Specifically, it seeks to assess whether a basic valuation filter can help reduce downside risk and enhance long term returns especially for conservative investors who might otherwise prefer parking their capital in fixed deposits. Have attached the Excel sheet below as well of my calculations.
NIFTY 20 PE Strategy.xlsx (13.3 KB)

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Should incorporate taxes and exit loads as well for a realistic comparison.

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Divyank, it would be worthfile if you can exit when Nifty PE > 23. Entry at <20 and exiting <22, XIRR comes out to be 12% (pre-tax). Can look at the analysis as well.

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Absolutely Correct. Have attached the post tax Capital Gains working for the readers reference.

NIFTY 20 PE Strategy.xlsx (14.1 KB)

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Yes Harshall you can definitely create your own investment strategy like exiting when the PE goes above 23. My idea behind posting this was to give a perspective for very conservative investors who would otherwise park all their money in liquid funds or FDs. I wouldn’t call it a risk free profit, but the odds are highly favorable with potential returns better than liquid funds.

Disclaimer: For educational purpose. This presentation does not constitute Investment advise and is merely an effort towards enhancing learning and knowledge.

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