NIFTY 50 INDEX: 15thJuly 2020. The market ended with a positive value of 10618 (+0.1%), yesterday there was a decline of 1.8%. Today the market opened with a positive moment around 1.2%, by this, the market disappointed the investors by falling to 0.1%. In this topic, we are going to cover on the following topics
· NIFTY 50 – Basic Understanding.
· Fair Value of NIFTY 50 P/E.
· 3 Years Returns Calculation.
· What an Intelligent Investor should do at present.
NIFTY 50 INDEX – BASIC UNDERSTANDING:
Nifty 50 is the most important indices among one of the leading stock exchange, NSE (National Stock Exchange) which was started at Mumbai in 1992. The major indices of NSE are Nifty Next 50, Nifty 100, Bank Nifty, Nifty IT, etc. NSE holds almost 1952 companies shares with the market capitalization of $2.27 Trillion USD as per 2018 data. It is the most traded stock exchange as they were the first to come with electronic transactions.
Nifty 50 has the components of India’s top 50 companies with various sectors. The allocation of sectors is as follows,
|NIFTY 50 INDEX – SECTORAL DISTRIBUTION|
· Automobile – 4.54%.
· Cement – 2.22%.
· Cigarettes – 4.18%.
· FMCG – 10.28%.
· Oil & Energy – 14.73%.
· Engineering – 2.79%.
· Fertilizer – 0.5%.
· Finance – 36.51%.
· IT – 15.04%.
· Media – 0.32%.
· Metals – 2.52%.
· Pharma – 2.72%.
· Shipping – 0.54%.
· Telecom – 3.13%.
FAIR VALUE OF NITFY 50 P/E:
To evaluate the Nifty 50 index, we have to understand, how to calculate the P/E of the Nifty 50. P/E in simple terms is Price of Nifty 50 divided by Earnings after tax. With the help of P/E, we can analyze whether nifty is undervalued or overvalued.
P/E Ratio vs Market Valuation:
· Less than 12 – Very Attractive.
· 12 – 16 – Attractive.
· 17 – 21 – Fair.
· 21-25 – Expensive.
· More than 25 – Very Expensive.
The current P/E is 27.88 which is highly expensive, the market is overvalued.
During 2017, the P/E was at 24.9, which was also expensive. The condition over 2017 was a market with good earnings and the market was in good shape to its boom. Considering the situation of Covid-19, currently there are many sectors that have lost completely like the automobile, Airline, some impact over Media, banking, and IT. These are much valued and investors have to make a decision.
To find the P/E value of Nifty 50 Index, Please click HERE
3-YEARS RETURN CALCULATION:
|Nifty 3 Years Growth|
The nifty 50 Index was at 10105 on 15th July 2017 and today (15thJuly 2020), it is at 10607.35. The XIRR growth of the market is just 1.63% return per annum, instead, it’s better to have money in the bank.
To calculate XIRR, please click HERE
· We all know that investing in equity is the only way to surpass inflation and gives us a 10-16% return per annum.
· We must know, when to invest, to get the desired return. It’s when the market P/E is at a Fair or attractive price.
· We cannot expect the same return of 10-16% P.A. by investing in a very expensive bullish market.
· During a bullish stream, always analyze your investment strategy with earnings and price of the market at which it’s traded.
WHO DRIVE THE MARKET?
· The market is heavily dominated by FII (Foreign Institutional Investors) and DII (Domestic Institutional Investors).
· The market is moved by the speculator and the long term investors are out of the market, they just keep watching.
· Being in the market as speculator or traders are like having a knife with sharp blades on both sides, in this highly expensive market.
· In the last 4 days FII has withdrawn 2823 Crores and DII has withdrawn 3464 crores out of cash market (stock market).
· Hence, the current market is been well driven by speculators.
WHAT AN INTELLIGENT INVESTOR DO AT PRESENT:
· To be an intelligent investor, we should know how to get better gain in long terms rather than bidding for a few thousands every day.
· Investors have to be aware that, in a volatile market where the earnings are depreciating, we have to stop investing in the market when P/E crosses 20-22.
· In a perfect economic condition, we can invest as earning grows, if not, it’s better to stay out.
· Beginners to market, should not stay out. Keep watching the market that how it is performing and how can we learn from the present condition.
· Until you find your stock at fair or attractive price, you can buy.
· It’s time to redeem all your actively managed mutual funds.
· Stop both SIP and Lumpsum to invest in Index mutual fund.
· When the market corrects itself or when earnings move in the forward direction than the price of the market, you can continue investing.
If not Equity, where to invest:
· We should not stick ourselves to only one set of investment instruments.
· We have to learn the concept of portfolio management.
· As Graham says, invest across 50% in equity and 50% in the bond market. It does not mandate that we should also follow the same, but we have to learn how to allocate our investment in different portfolios.
· As we have learned that last three years Nifty 50 Index has yielded only 1.67% P.A. we have to think in alternative ways, that when the market will be overvalued.
· In the last three year, Debt or Bond market has shown a consistent growth of 7.5 to 10%, which is phenomenal. These kinds of markets maintain the same interest rate for almost decades.
· So, wisely plan to make your money grow. Equity is not the only place to grow your money all the time.
· In this time, where the market is overvalued, we have to take a measurative step to diversify our portfolios.
· Still, you can park the money that you don’t require for next 15-20 years in the equity market, but you have to be emotionally strong to stand with market heavy fall and its recovery.
Note: Debt funds too have some risk, read all the documents and fact sheets before investing. Check the CRISIL rating of all the company bonds.
· Always, try to calculate the P/E of the Nifty 50 Index, which is the only way to acknowledge the behavior of our market.
· When the market P/E is above 21, kindly stop investing and preserve your capital.
· Instead, invest in any of the debt or bond markets for low risk and average return.
· FII and DII have withdrawn more than 7000 crores in the last 4 days.
· Stop all your SIP and Lumpsum investments in active mutual and index funds.
· Wait for the market to be back to its fair price, where you can start your SIP and Lumpsum.
· Diversify your assets into various portfolios.
STRATEGIES TO PICK SHARES AND MUTUAL FUND
INVEST IN EQUITY – INVEST IN EQUITY SHARES
This subject is completely taken from practical sense from most of the successful financial leaders and even from my mentors and myself.
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