# P/E Ratio Analysis of Nifty Returns – 2017 Update

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Edited: An updated and more detailed analysis is published in 2019 and is available here.

This is the detailed annual analysis – comparing Nifty P/E with Investment Returns.

It compares returns earned (during various periods ranging from 3 to 10 years) when investments have been made at various PE levels of the Nifty-50.

Before we get to the findings, lets try to understand the purpose of this analysis.

### Purpose of comparing Nifty PE with Returns

First of all, this is not a sure-shot method to make money.

Just because we can find some clear trends from past data doesn’t mean that same will be replicated in future. Markets are dynamic and history is no guarantee of future. The sole purpose of this analysis is to realize that there is obvious relation between the market valuations and returns you will get. If you buy low (valuation wise), chances of earning good returns increase and vice versa.

This study tries to highlight the historical trends about possible returns one can get when the money is invested (in Nifty 50) at various PE levels. That’s it.

### How to Analyse PE Vs. Returns?

What I have done here is that I have calculated returns earned on investments made at all Nifty PE levels. The time periods for return calculations are 3 year, 5 year, 7 year and 10 years.

Lets use a simple example to understand this.

Suppose you had invested money in Nifty on 24th-February-2004, when its PE was 19.97 (actual data).

Now I have calculated returns starting from 24th February 2004 for periods of 3, 5, 7 and 10 years. The CAGR returns have been 29.3%, 8.5%, 17.0% and 13.0% respectively.

This calculation has been done for each and every day since 1st January 1999 (day since when Nifty PE data is available). I had several thousand data points for each of these periods. The days that do not have forward returns for 3-years have not been considered in analysis of 3-year returns (likewise for 5, 7 and 10 year studies)

To simplify the findings, I have grouped Nifty PE into 5 groupings.

### Nifty-50 PE Ratio and Investment Returns

So this is what I have found:

Clearly, the data shows that when you invest at low PEs, your expected future returns are high.

So if one had the courage to invest in Nifty when PE was less than 12, the average returns over the next 3, 5, 7 and 10 year periods would have been an astonishing 39%, 29%, 22% and 19% respectively! But sadly, its very rare to find days where Nifty is trading at such extremely low valuations.

On the other hand, if investments were made when PE ratios were above 24 (which is the overvalued territory), the chances of earning high returns in near future are pretty low. Infact, money invested at such inflated valuation levels, for the next 3, 5, 7 and 10-years have earned on an average are (-) 5%, 3.4%, 9.6% and 12% respectively.

Also Read: Why I chose PE of 12 and 24 – Do Indian Markets Bounce off Nifty PE 12 and 24?

At the time of writing on this post, the Nifty PE is about 23-24 (more details can be found here).

But it is important to note that these figures are based on historical data (of last 18+ years). The trends no doubt are easily evident here. But they may or may not be repeated in future. There are no guarantees in markets.

Markets won’t behave as you expect them to behave just because you have found its rhythm. You will not get returns just because you want them.

This shows that if you invest in high PE markets, your chances of low (and even negative) returns increase substantially. Investing at lower PEs can give bumper returns! But it is not easy. It takes a lot of courage, cash and common sense to invest when everybody else is selling. It is very easy to sound smart and quote things like ‘be greedy when others are fearful’. Unfortunately, very few are able to be actually greedy when others aren’t.

But lets focus on another important fact here.

### Risk with dealing with Average Returns

The table above depicts a very clean and obvious relationship between P/E and Returns.

But the above numbers are just ‘averages’. And that can be risky if you solely invest on basis of averages.

To explain this more clearly, lets take an example. Imagine that your height is 6 feet. Now you don’t know swimming. But you want to cross a river, whose average depth is 5 feet. Will you cross it?

You shouldn’t – because it’s the average depth that is 5 feet. At some places, the river might be 3 feet deep. At others (and unfortunately for you), it might be 10 feet.

That is how averages work. Isn’t it?

So this needs to be kept in mind…always.

### Adding More Data points to PE-Analysis

A better picture can be painted if in addition to average returns, we also find out:

1. Maximum returns during all the periods under evaluation
2. Minimum returns
3. Standard deviation

Have a look at tables below now:

If you have observed carefully, there are big differences between the minimum and maximum returns for almost all periods

So the returns that you will get will depend a lot on when exactly you enter the markets. Two people entering the markets at (lets say) PE=17.2 would have got 5-year returns ranging from 2.6% to 33.0%. Shocking! Isn’t it?

My previous statement ‘returns that you will get will depend a lot on when exactly you enter the markets’, does sound like timing the markets. But this is a reality. For those who can do it, timing the market works beautifully.

Hence even though the average returns give a good picture for long-term investors (look at the table for 10 year), its still possible that you end up getting returns that are closer to the ones that are shown in minimum (10Y Returns) column and not the Averge Returns. 😉

This is another reason why I introduced the column for standard deviation in all tables above (see last column).

Analyzing standard deviation tells you – how much the actual return will vary from the average returns. So higher the deviation, higher will be the variation in actual returns.

### Can You Catch the Markets at Right PE Multiples?

Ideally and armed with above insights, it makes sense to buy more when valuations are low. Isn’t it? Buy Low. That is the whole idea of investing.

But real life is not that simple.

It is very difficult to catch markets on extremes. Its like a pendulum – keeps oscillating between overvaluation and undervaluation.

So should you wait to only invest at low PEs? Though it might make theoretical sense to do it, fact is that it is very difficult to wait for low PE markets.

Just have a look at this 5-year table I shared earlier in this post too:

Look at the time spent by the index at sub-PE12 levels.

It is just about 1.7% of the time since 1999 (Ref: Column name ‘Time Spent in PE Band’ in tables above).

Markets at below PE12 are extremely rare.

For common investors, it’s almost impossible to wait for such days. Infact, such days might be spaced years apart.

So the best bet for common people is to keep investing as much as possible, via disciplined investing (like SIP in equity mutual funds). Its not perfect (like buy low sell high) but it is your best bet given all the constraints.

### Long-Term Investors have Better Chance of Doing Well

Another insight that this study gives is that as your investment horizon increases, the expected returns more or less are reasonably good enough, even when one invests at high PEs.

Have a look at 10-year returns table below:

Now 10-year is long term.

So, even if an investor puts his money in the index at PE24, the historical average returns are more than 12%. That’s pretty good. And what about the maximum and minimum returns achieved when investing around PE>24? At 13.8% and 10.5% respectively, these are not bad either. This is what really shows that if you are investing for long term, equity is your best bet for wealth creation.

The longer you stay invested, higher are the chances of making money in stock markets…even if you have entered at higher levels.

Caution – I know that’s a dangerous statement to make but to keep things simple, please read it in the right spirit.

On the contrary, if someone was thinking to invest at high PEs (above 24) for less than 3 years, then there are very high chances that the person will lose money:

### Asking Again – Whether This Approach works in all kinds of investing?

My answer is that no one strategy can work in all conditions.

Knowing the broader market PE gives a fair idea about the valuations of overall markets. It tells you when the market is overheating and that you should take cover. This in turn can help reduce the chances of making mistakes when investing. Similarly, this knowledge of PE-Return Relationship also helps in identifying when markets are unnecessarily pessimist. If you are brave at such times, you can make some serious money.

And please don’t think about investing in individual stocks just because Nifty PE is low. Individual stocks have their own story and need more in-depth analysis.

## What about Nifty changes? Does it not impact this analysis?

That’s a valid point.

The index management committee that is responsible for index (Nifty 50) maintenance regularly bring in and move out companies from the indexes. The Nifty composition of 2007 was quite different from that of 2017. Similarly, the index composition of 1999 might too be different from that of 2007 and 2017.

Try to understand it like this. If the index is made up primarily of companies that are low PE-types, then index at overall level will tend to have low-PE. Whereas if the index is made up of high-PE companies, it will tend to have high PE. So actual definition of high and low PE will be different for both type of companies, and so in turn for index. A PE of 15 for low-PE company might be very high whereas for high-PE company might be very low.

This is an important factor that should be kept in mind.

I have written about how changes in index constituents can impact PE analysis earlier too.

### What Should You Do as a Common Investor?

I am assuming that you are not Warren Buffett. 🙂 But jokes apart, fact is that most people do not have the skill or time to get into deep investing.

So what should such people do?

First thing is to simply stick with regular disciplined investing (easily achievable through MF SIPs).

With that taken care off, you should try to invest more when market valuations are low. This will help increase your overall returns in long term.

There is a strong (but not guaranteed) correlation between the trailing PE ratio and Nifty returns. And this small study proves the same and provides some useful insights. If we were to go by the historical data, the Nifty delivers higher return (in long term) whenever the PE ratio is low. On the other hand, it tends to deliver very low to negative returns, whenever the PE is very high and investment horizon is short.

You as an investor can use this insight as a backdrop to take your investments decisions.

In case you are interested in reading previous years’ analysis, then you can access them here:

I regularly update PE and other ratios of Nifty50 and Nifty 500 on State of the Indian Markets page.

1. vasudev says:

as usual very well done only query the composition of nifty changes the shares that were 10 yrs back
may not be the same as today . does this matter will be obliged if you could look into this and enlighten
us

1. Dev Ashish says:

Hi Vasudev

I have mentioned this in the analysis too – that changes in Nifty composition do play a part on what we can define as ‘normal-PE’ for that ‘particular-Nifty’. I will try to deep dive into this aspect in a later post. But this highlights the fact that while considering Nifty-PE, we should remember that changes in composition of Nifty will play a role here.

1. sures says:

Dev.. it would be more interesting if the PE range is reduced for analysis. Pls publish the returns for PE 12 -14, 14 – 16, 16-18, 18-20…

2. Dev Ashish says:

Alright. Will do it soon. But not sure whether this additional bifurcations of data will help take better decisions or not. More information is not necessarily useful I think. But I will publish it.

2. Nishanth Muralidhar says:

Thanks for this detailed and informative analysis , Dev

1. Dev Ashish says:

Glad you found it useful Nishanth 🙂

3. Shyam says:

Dear Dev,

Thank you for the analysis. This analysis is from Jan 1999 & forward from that point. But suppose an investor starts Jan 2010.. if one were to look back from where we are today and go by the heat maps, we find that since Jan 2010 The Nifty has never fallen below 16. I presume, 7 years is quite a long time for the analysis.

The time spend in the 2 bands you mentioned: PE Band below 12, 12 to 16 is 0%! So for this investor since 2010, the returns is very range bound even with SIPS. and the 3Yr, 5Yr and 7Yr tables change drastically.

I wonder if you have tables, or analysis for new investors started off 7-8 years back? Is the range band for these investors 16 (instead of 12)?

1. Dev Ashish says:

Hi Shyam

Its true that if we restrict our dataset to recent past, the matrix can change and we can say that PE16 is the new PE12. 🙂

I have the data since 1999 and its easy to plot something for 7-8 period. But that would mean we are not taking into account full market cycle (rise of 2007 and crash of 2009). So the data depiction might not paint the correct picture. So longer the period under consideration, better it is. Once can play around with data and maybe, give more weightage to recent past. But maybe, that will be like trying to extract data trends that justify what we ‘want to think’.

4. Shreekant Malde says:

Hi Dev,

Thanks for sharing such detailed analysis as always.

I’ve a query and sort of a request if you don’t mind 🙂

Given that it is really safe to invest via MF SIPs for routine investors,
(I) can we have such analysis for any top rated Diversified Equity MF (like HDFC Top 200)? and
(II) can we have such analysis for SIPs of such a MF?

Best Regards,
Shreekant

1. Dev Ashish says:

Hi Shreekant

I will have to check it whether MFs provide the PE related as frequently or not.

But one thing to note here is that if the fund manager is changing portfolio stocks regularly (and these stocks happen to have varied PEs), then the utility of such an analysis will be reduced. Though it can still help as one datapoint among many others.

1. Shreekant Malde says:

Hi Dev,

Yes I agree, it may be difficult to get that historical data for MFs.
But if we do get, it would surely add value as an additional data pointer.

If I come across anything that is helpful, will surely share it with you.

Thanks

5. Nishtha says:

Hi Dev, at current level of market do you advise to invest or advise to stay away? My fear is that I will miss the rally if stay away, since I missed most of rally till now

1. Dev Ashish says:

Hi Nishtha

That is a tough one to answer. There is no perfect advice here as you know markets have their mind of their own.

But if you are invested in it for really long term (dont need the money for several years) and in good stocks/MFs, you might consider remaining invested. As for fresh investments (primarily lumpsum), the overall market doesn’t seem great for that. SIPs are still fine though.

6. GK Swamy says:

What happens if individual stock or MF fund has low PE as compared to Nifty or its peers ?

1. Dev Ashish says:

Investing in individual stocks is a different story altogether. Its possible that a stock with low PE is not a good investment and that with a high PE is good one. It differs from case to case. Looking at Nifty PE and comparing it with stock PE is useless. Though a very low Nifty PE can indicate that market sentiments are low and hence, its possible that stock in question too might be quoting at a low valuation. But that is not guaranteed.

7. RupeeVest says:

Very informative article. Thank You.

1. Dev Ashish says:

Thanks 🙂

8. Riyaz Mohammed Ibrahim says:

Do you manually calculate these PEs or Is there any tool which notifies of these PE updates or weekly tracker kinda, idea is if it goes down to get notification

1. Dev Ashish says:

Data is available on NSE’s website. I manually track it.

9. dilip says:

Sir,excellent presentaion.
Few querries as below:
1) Some analysts take Forward PE and create confusion ( PE appears lower). what is standard method/process
3) looking to current High PE and hence very low possibility of Good Returns in coming 1 year ( 24% of time where it will stay) on our current investmentsm how we should twick our asset allocation….
4) march 15 to april 17 sensex is 30000 level so no returns in sensex…in fact real loss…how to manage such situation?

thanks.

1. Dev Ashish says:

Hi Dilip

Thanks for your kind words. My replies point-wise:

1) Both can be used. Its best to consider both instead of simply relying on past data or future prospects.
2) Yes. That can be done too. But correctly estimating the G is what is tough.
3) Varies from case-to-case. No one size fits all.
4) That’s how markets are. Its never going to be a straight line up. 🙂

10. SLN says:

Very useful PE ratio analysis for investment in mutual funds. I wish more data analysis was shown for Nifty500.

1. Dev Ashish says:

1. Dev Ashish says:

Thanks Ritesh! 🙂

11. Mohit Gupta says:

Hi,
I have been investing in SIPS regularly for the last 3 years. Now the PE is at 26. Do you think it would be better if I liquidate my mutual funds leaving only the last 12 months sip amount (due to tax and exit load consideration) and putting this money in liquid debt funds. I would continue with the sips however. Once the markets come back to say 18 or 20 PE levels, then get the sips transferred back to mutual funds through STP. Please give your comments

1. Dev Ashish says:

Hi Mohit

This can be one of the many approaches. But you should also understand that trying to time the market is something that is fairly difficult, if not impossible. 🙂 But you should maintain your asset allocation in line with your financial goal. This might require regular rebalancing and this would be sufficient for most people.

1. sidharth says:

Dear Dev,

I am investing in MF and Share Market for last 12 Years. I am also from Financial Background and track the market very closely almost on daily basis. You have done a tremendous study, simply superb. From last year or so the Nifty PE is continuously above 26 or so, Dividend Yield is going down infact sometime it went upto 98-96 Paise, I also checked that in 2008 when the nifty crashed the PE was around 28 or so and Div Yld went down to 88 paise. Last Year I had put almost 80% money in Debt Funds in which I got 9% return (Average), at same time I invested 20% in Equity Funds (Diversified Equity) in which i got return of 20% (Average), Now I after 1 year I see Nifty is slowly reaching towards new high and PE is still at between 26 to 27. Now I am so confused, did I lost 11% on my 80% of invested money ?

12. Nishant Agarwal says:

This is a gem of an article. Very practical and actionable insights. Excellent analysis. I really like the fact that you understand the fact that waiting too long for the right timing is difficult and can lead to lower savings.

1. Dev Ashish says:

Thanks Nishant 🙂

13. sidharth says:

Dear Dev,

I am investing in MF and Share Market for last 12 Years. I am also from Financial Background and track the market very closely almost on daily basis. You have done a tremendous study, simply superb. From last year or so the Nifty PE is continuously above 26 or so, Dividend Yield is going down infact sometime it went upto 98-96 Paise, I also checked that in 2008 when the nifty crashed the PE was around 28 or so and Div Yld went down to 88 paise. Last Year I had put almost 80% money in Debt Funds in which I got 9% return (Average), at same time I invested 20% in Equity Funds (Diversified Equity) in which i got return of 20% (Average), Now I after 1 year I see Nifty is slowly reaching towards new high and PE is still at between 26 to 27. Now I am so confused, did I lost 11% on my 80% of invested money ?

(sorry asking question again as no response given)

14. Mohit Damani says:

Sir,

I stopped all my sip in equity mf since the nifty hit 9400 i.e. PE of 24.

I started contributing the same amount in liquid fund and bank Rd so as to have ample cash power once the market correct.

But Mr. Market have breached PE of 26-27 levels. (I am having a feeling of leaving the party too early kind of feeling)

I am just curious to know what i did was it wrong or a right strategy to follow???

Regards.