If you are also an investor then finding the right market level is important for making better financial decisions. The Nifty P/E ratio is a useful tool in identifying the market level.
By analyzing past trends and graphs and comparing the P/E ratio, investors can easily identify the market level with the help of the Nifty P/E ratio.
Analyzing Data Using Nifty P/E Ratio
Taking the example of Franklin India Bluechip Fund and analyzing its data for this we will get higher lumpsum returns what is the reason for the higher return cause that might create an impact in the long run?
For that, we have to study the Nifty chart. This graph of Nifty 50 that you are seeing, you are seeing from 2007. The graph has been plotted up to 2023 here. And here if we look at the levels once.
Looking at the current levels, then in December 2023, the value of Nifty was approximately 21367. Before this, if we go three years ago, if we talk about December 2020, then this value was approximately 13877.
From here, better returns came out in the lump sum. What can be the reason? Here, maybe the levels of our market were reasonable. Because after Covid, not much rise was seen in the markets. In fact, if we had invested on these levels, that is, from March to June 2020, if we had invested at that time, then there would have been a lot of returns in the lump sum.
However, here we are looking at the absolute numbers, so we are looking at three-year returns. That’s why we have taken out the data of December 2020 here. Then let’s look at the five-year levels once.
Five years ago, in December 2018, the level was 10,816. Look here, the markets were almost flat. So it was not like there was a bottom coming anywhere or the markets had risen too much. So here if we are investing in SIP, then whenever our markets are falling in the middle, then our levels are getting average down. That is, our average NAV is getting average out. So here we are getting better returns in SIP, that is, 16.67% returns.
And let’s go back, let’s look at the 10-year returns. In December 2013, there were almost no flats. In fact, the markets were rising a little from here. So here we did not see much difference in lump sum and SIP. But now we go to the 2008 levels. If we look at the level of December 2008, then by chance, almost the bottom level was running.
Nifty was running at 2900 at that time. Today the level is running at 21,300. So now look, when we invested at the bottom, then you can see that our returns came out 14.92% annualized returns.
Almost 15% of returns have come out every year in this mutual fund. Now it is not that these returns have come out only in this mutual fund. You can see any mutual fund. They follow Nifty almost. So one thing is coming out here. Whenever the market levels are low, at that time if we invest the money in a lump sum, then our returns come out very well in the future.
How To Identify Market Levels With Nifty P/E ratio?
So now the question arises how can we find out the market levels? Are the markets currently overvalued or undervalued? If they are undervalued, then it can be very beneficial for us to put money in the lump sum in the mutual fund.
As we have seen from the data so one indicator to find out the market level is Nifty PE. We can study the overall Nifty P/E ratio. Now what is the price to earning ratio?
As we find out the Nifty P/E ratio or price to earning ratio of stock. Similarly, we can find out the average price to earning ratio of Nifty 50 stocks that is our Nifty PE.
How To Find Price To Earning Ratio Of Stock
Now how do we find out the Nifty P/E ratio or price to earning ratio of any stock? In that, we divide the stock price by its earnings per share.
So we kept the stock price in the numerator, that is the stock price of that day. And we divide it by earnings per share. How do we find the earnings per share? We divide the total net profit of the company by the total number of shares.
So this is our earnings per share. Now see, this Nifty PE or stock PE, you don’t have to take it out yourself we are just talking for understanding.
All these values are readily available to you. You can go to the website of National Stock Exchange and check the current PE of Nifty.
How To Use Nifty PE?
Now if we get this Nifty PE, what to do with it? So see, if I talk about today’s Nifty PE, it is running on an average of 22.6 as of December 2023. We can compare this PE with the average of the last 10 years or the average of the last 20 years. From that, we can guess whether this level is running around the average or it is running above the average.
If it is running above the average, then it means that the markets can be overvalued. There can be some cool-off in the market. In such a case, lump sum investing may not make that much sense. If it is running below the average, then we can say that it is undervalued in the market.
And if it is coming within range, then we can say that it is running around the average. So if we take out the 10-year average, then the average of Nifty PE is around 24.5. If we take out the 20-year average, then it is 21.6.
The current average is 22.6. So it means that it is coming around the average. So on today’s date, we can’t say that we are going to benefit a lot in lump sum or in SIP. It means that no matter which investing we do, we are not going to make any difference because the average levels are running around the market. So this is one way to study the market levels.