We are a big promoter of the below strategies if investing in equity mutual funds –
- Invest systematically through SIPs
- Invest with a long term perspective
We did a study to know how NIFTY has performed historically if you bought the NIFTY at different levels of P/E. To get a better perspective of level based returns, we looks at two time frames of 3 years and also of 5 years. The idea of 3 year perspective is to get a quick short term response while that of a 5 year return is to get a slightly longer term perspective. The idea is to test whether the whole idea of buying at lower P/E really works for you in the medium and long run.
The above analysis of the impact of buying at different levels of P/E is quite interesting. When you consider a 3 year time frame, there is a clear relationship between the level of P/E that you buy at and your returns. Here, the advantage of buying at lower P/E is evident.
However, when you consider a 5 year perspective, that low P/E advantage gradually starts to diminish. That essentially means that if you were to do a SIP on an equity fund then the level of your entry would be actually immaterial from your long term wealth creation point of view. That could be the big takeaway.
The big news is that one need not obsess over the P/E of the NIFTY if the perspective is over 5 years. In fact, the longer the time frame you consider, the lower the P/E hunting is going to actually matter to your returns.