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NPS Rs 50,000 per year – Retirement Corpus & Pension Calculation

Even though NPS is a product designed exclusively for retirement planning, what attracts most people to NPS is Rs 50,000 extra tax benefit it offers via deduction.

As per the current tax rules (2019-20), there is an additional Rs 50,000 tax deduction available under Section 80CCD (1B) for NPS contributions made in NPS (Tier 1). This benefit is only available to NPS subscribers and most importantly, is available in addition to the Rs 1.5 lac deduction available under Section 80C.

And this extra Rs 50,000 tax deduction for National Pension Scheme NPS is what catches most people’s interest. And such people keep looking for easy-to-use NPS calculators.

But before we find out the details of NPS pension calculations, let me remind here that ideally, investment decisions should be governed by real financial goals and not tax-saving alone (read why?). But most people ignore this important advice and get attracted / give undue importance to things like tax-saving. But let’s not get into that discussion today.

To summarize the tax angle of NPS, investments of up to Rs 50,000 in NPS Tier I account in a financial year qualify for additional tax deduction under Section 80CCD (1B) of the Income Tax Act. This is in addition to the Rs 1.5 lac deduction available via Section 80C.

Now as mentioned earlier, this extra 50,000 NPS tax benefits attracts many.

And I regularly get queries from people, which are broadly like:

“I already utilize my Section 80C limit of Rs 1.5 lac using EPF, PPF vs ELSS, Home Loan EMI Principal repayments, etc. But I want to save more tax. So can I also use NPS for extra tax savings? And if I do, what would be my final retirement corpus and pension if I put just the additional Rs 50,000 every year in NPS?”

Though suitability of NPS for retirement planning is something worth debating, let’s just limit the scope of this article to answer the question below:

What would be the final corpus and pension Rs 50,000 is invested every financial year in NPS Tier 1 account till the age of 60?

Before we run the numbers and kind of simulate the NPS Pension Calculator, we need to understand the latest NPS withdrawal rules (2019):

  • Minimum 40% of the NPS maturity proceeds (corpus) must be used to purchase an annuity plan. This 40% isn’t taxed. But, the income (or pension) generated from the annuity will be taxed at the then tax slab rate of the retiree.
  • The remaining 60% is exempt from tax and can be withdrawn as lumpsum.
  • If they want, then NPS retirees can use more than 40% (up to 100%) of the NPS corpus to purchase the annuity. In that case, the lumpsum available will decrease accordingly. For example – one may choose to purchase the annuity plan using 65% of the NPS corpus on retirement (instead of the required minimum of 40%). He will then only get remaining 35% as a one-time lumpsum tax-free payout.

So according to NPS rules, basically, there is no tax at the time of withdrawal at retirement as i) 40% goes towards annuity purchase tax-free and ii) remaining 60% is paid out immediately as a tax-free amount. The only time any tax has to be paid is on the income being generated from the annuity in later years.

That was about NPS income tax benefits, NPS tax saving and NPS tax exemption. Now let’s come back to the question at hand:

What would be the final corpus and pension Rs 50,000 is invested every financial year in NPS Tier 1 account till the age of 60?

Before we do NPS calculations for 2019, let’s make a few assumptions:

  • NPS Starting Age – 25 / 30 / 35 / 40
  • Retirement Age – 60
  • Investment Tenure – 35 / 30 / 25 / 20 years (as starting age is different but retirement fixed at 60)
  • Annual NPS investment – Rs 50,000 only
  • Does investment amount increase every year – No
  • Expected Returns – 10% (assuming a balanced mix of equity and debt)
  • Part of corpus used for Annuity purchase on retirement – 40%
  • Part of corpus used for Lumpsum Payout – 60%
  • Annuity Rate at time of retirement – 6%

So here are the results of calculating NPS maturity calculator and pension:

Start at 25 and Retire at 60 (35 years tenure)

  • Total Contribution – Rs 17.5 lac
  • Total NPS Corpus – Rs 1.49 crore
  • 40% used for Annuity Purchase – Rs 59.6 lac
  • 60% Lumpsum Tax Free Payout – Rs 89.4 lac
  • Monthly Pension from Annuity – Rs 29-30,000 per month (before taxes)

Start at 30 and Retire at 60 (30 years tenure)

  • Total Contribution – Rs 15.0 lac
  • Total NPS Corpus – Rs 90.5 lac
  • 40% used for Annuity Purchase – Rs 36.2 lac
  • 60% Lumpsum Tax Free Payout – Rs 54.3 lac
  • Monthly Pension from Annuity – Rs 18,000 per month (before taxes)

Start at 35 and Retire at 60 (25 years tenure)

  • Total Contribution – Rs 12.5 lac
  • Total NPS Corpus – Rs 54.1 lac
  • 40% used for Annuity Purchase – Rs 21.6 lac
  • 60% Lumpsum Tax Free Payout – 5 lac
  • Monthly Pension from Annuity – Rs 10-11,000 per month (before taxes)

Start at 40 and Retire at 60 (20 years tenure)

  • Total Contribution – Rs 10.0 lac
  • Total NPS Corpus – Rs 31.5 lac
  • 40% used for Annuity Purchase – Rs 12.6 lac
  • 60% Lumpsum Tax Free Payout – Rs 18.9 lac
  • Monthly Pension from Annuity – Rs 6300 per month (before taxes)

Note – These numbers are indicative, based on an assumed constant average rate of return of 10% and annuity rate of 6% (which may not actually remain constant). The actual returns, final NPS pension, final lump sum amount one gets from NPS may be higher or lower. Also, you never know whether the 80CCD deductions will remain until your retirement or not.

And it’s pretty obvious that to make the most of the NPS (like in many other long term investment product too), the subscriber should ideally start investing as early as possible. And if one increases the annual (or monthly) contribution towards NPS every year (in line with the increase in income), then that would make the final NPS Retirement Corpus even bigger.

So now you have your answers to questions like what would be final NPS retirement corpus and monthly pension (income) in retirement years.

By the way, many people do compare NPS with PPF. But PPF is a pure debt product which too can be used to achieve goals like PPF crorepati if nothing else. But jokes apart, NPS is a hybrid equity-debt product and PPF is pure debt. So ideally, they shouldn’t be compared. Read more about PPF here and if you want, try your hands at this PPF calculator as well.

All said and done, National Pension System or NPS is designed to save for the post-retirement years, by making contributions during the working years. But is it the best-suited product for retirement saving or not? The answer isn’t that easy.

It may be suitable for some people and it may not be suitable for many others.

Many people’s retirement plans are best served via simple SIP in Equity Funds, regular EPF contributions and occasional Debt Funds (for rebalancing, etc.). And if the money being saved monthly towards retirement is high, then Rs 50,000 NPS tax rebate doesn’t seem that attractive for them.

Like a true retirement product, NPS is very illiquid and it’s difficult to take out money before you turn 60 (i.e., retirement age). So for those planning early retirement, it might not be the best option. More so because if you quit NPS before turning 60, then the NPS Rule’s original condition of using 40% corpus for annuity purchase changes to 80 percent! That is, you would compulsorily need to purchase an annuity plan using 80% of your NPS savings. And only the remaining 20% will be paid as a one-time payout. That’s kind of unfair to early retirees!

So no doubt the 80CCD deduction gives you additional tax benefits for investing Rs 50,000 in NPS National Pension Scheme. But NPS tax benefit and tax-saving are one thing and product suitability is another. And whether NPS is actually suitable for you as a retirement savings product or not – is another matter altogether.

Note – If you want to find out your NPS retirement corpus and NPS monthly pension, then go ahead and Download FREE Excel-based NPS Pension Calculator.

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Explained – Nifty Indices (Nifty50, Nifty Next 50, Nifty 500 & 10 Others)

There are many popular indices in Indian stock markets. You already know Nifty50 and Sensex and you regular lookup for Nifty live or Sensex live data. But these aren’t the only indices as many of you already know.

There are several others as well – like Nifty100, Nifty Midcap 50, Nifty 500, etc. In fact, the NSE maintains around 13 broad market indices. These are:

  1. Nifty 50
  2. Nifty Next 50
  3. Nifty 100
  4. Nifty 200
  5. Nifty 500
  6. Nifty Midcap 50
  7. Nifty Midcap 100
  8. Nifty Midcap 150
  9. Nifty Smallcap 50
  10. Nifty Smallcap 100
  11. Nifty Smallcap 250
  12. Nifty LargeMidcap 250
  13. Nifty MidSmallcap 400

Wow! It can be confusing. And there are many more indices like the strategic ones. But let’s try to see how all the above-mentioned 13 indices are related to each other and fit into the broader index Nifty 500.

Below is shown the index hierarchy published by NSE (here) as shown below:

Nifty Index Broad Market India

Let’s try to understand the structure above:

NIFTY 500: This index sits at the top. It represents the top 500 companies based on full market capitalisation from the eligible universe. In a way, you can say that it includes all the other 12 indices within itself.

NIFTY 100: This represents the top 100 companies (i.e. from 1 to 100) from within the NIFTY 500. This index basically tries to track the performance of companies having large market caps.

NIFTY Midcap 150: This index represents the next 150 companies (i.e. companies ranked from 101 to 250) within the NIFTY 500. As is obvious, this index tries to measure the performance of mid-cap companies.

NIFTY Smallcap 250: This index represents the remaining 250 companies (ranked from 251 to 500) in the NIFTY 500. And you guessed it correctly; this index measures the performance of small-cap companies.

So as you see, the index Nifty 500 is basically made up of the following 3:

  • (1 to 100) – Nifty 100
  • (101 to 250) – Nifty Midcap 150
  • (251 to 500) – Nifty Smallcap 250

Nifty 500 Index constituents

Now, these 3 major indices themselves are made up of other individual indices.

The Nifty 100 has two parts:

Nifty 100 constituents

The Nifty Midcap 150 has two parts too:

  • NIFTY Midcap 50: This includes the top 50 companies from within the NIFTY Midcap 150 index.
  • NIFTY Midcap 100: This includes all the companies from NIFTY Midcap 50 above. The remaining companies are selected based on average daily turnover from NIFTY Midcap 150 index.

Nifty Midcap 150 constituents

The Nifty Smallcap 250 has the following two parts:

  • NIFTY Smallcap 50: It represents the top 50 companies selected based on average daily turnover from top 100 companies selected from the NIFTY Smallcap 250 index.
  • NIFTY Smallcap 100: It includes all companies from NIFTY Smallcap 50. And the remaining companies are selected based on average daily turnover from the top 150 companies selected from NIFTY Smallcap 250 index.

Nifty Smallcap 250 constituents

So till now, you have seen that at the top of the index hierarchy is the all-encompassing Nifty 500. From that we have 3 indices derived – (i) Nifty 100 (which is made up of Nifty 50 and Nifty Next 50); (ii) Nifty Midcap 150 (which is itself made up of Nifty Midcap 50 and Nifty Midcap 100) and (iii) Nifty Smallcap 250 (which is itself made up of Nifty Smallcap 50 and Nifty Smallcap 100)

Let’s check the remaining ones

NIFTY 200: This is basically made up of companies belonging to Nifty 50, Nifty Next 50 (or call it NIFTY 100) and the NIFTY Midcap 100.

NIFTY LargeMidcap 250: This includes all companies from NIFTY 100 and NIFTY Midcap 150. It intends to measure the performance of the large and mid-market capitalisation companies.

NIFTY MidSmallcap 400: This includes all companies from NIFTY Midcap 150 and NIFTY Smallcap 250. It intends to measure the performance of the mid and small market capitalisation companies.

Sounds complex no doubt. But if you once again have a look at the image below again, it seems quite logical:

Nifty Index Broad Market India

As per NSE, the calculation for the broad indices such as NIFTY 50, NIFTY Next 50, NIFTY 500, NIFTY 100, NIFTY Midcap 150, NIFTY Smallcap 250, NIFTY 200, NIFTY Midcap 50, NIFTY Midcap 100, NIFTY Smallcap 50, NIFTY Smallcap 100 and NIFTY MidSmallcap 400 are done online on all days that the National Stock Exchange of India is open for trading and disseminated through trading terminals and website and while that of NIFTY LargeMidcap 250 is computed at end of the day.

If you wish to read more about these individual indices, then click the links below:

  1. Nifty 50
  2. Nifty Next 50
  3. Nifty 100
  4. Nifty 200
  5. Nifty 500
  6. Nifty Midcap 50
  7. Nifty Midcap 100
  8. Nifty Midcap 150
  9. Nifty Smallcap 50
  10. Nifty Smallcap 100
  11. Nifty Smallcap 250
  12. Nifty LargeMidcap 250
  13. Nifty MidSmallcap 400

In addition to the above broad-based indices, NSE also has tons of other indices like NSE Sectoral Indices (about 11 indexes), NSE Thematic Indices (about 20 indexes) and finally NSE Strategy Indices (about 25+ index).

You can check out the fact sheets of all the above indices in once place here – Nifty Index Factsheets. And if you wish to track the Nifty live index data, then you can use this link – Live Nifty Index Data.

The idea of sharing these details is nothing to do with promoting Nifty and its indexes 🙂

It is rather to show how many other important indices are there which get overshadowed by the Nifty50 and Sensex. Atleast if you read the above details even casually, you will get an understanding of how these indices are related to one another and parts and sub-parts of each other.

And as the idea of index funds gradually gain acceptance in India, you will see more and more index funds being launched for various above-discussed indices.

The ones like Nifty 50 Index Funds and Nifty Next 50 Index Mutual Funds are already available and gaining popularity. The others ones like ones for Nifty 100 index fund, Nifty 100 equal-weight index fund, Nifty Midcap 100 index fund, Nifty Midcap 50 index fund, Nifty Smallcap 100 index fund, Nifty Midcap 150 index fund, Nifty 200 index fund will be launched by various fund houses in times to come.

State of Indian Stock Markets – July 2019

This is the July 2019 update for the State of Indian Stock Markets. This update includes the historical analysis (since 1999, i.e. about 20+ years) and Heat Maps for the key ratios like P/EP/BV ratios and Dividend Yield for Nifty50 and Nifty500.

This time (and going forward) a new section on the last 12 month’s index movements and PE dynamics during the said period will also be analyzed. The analysis will be done on a rolling basis. That is, it will include monthly analysis (for each of the last 12 months) as well as analysis for specific periods like the last 1 month, last 3 months and last 6 months. This is being done to highlight (if any) the changes which become evident in market sentiment from a data perspective.

Before we move forward, please remember a few things:

  • The numbers shown in the analysis and tables below are averages of P/E, P/BV and Dividend Yield in each month (unless otherwise stated). Neither Nifty50 heat maps nor Nifty500 heat maps show the maximum or the minimum values for each month.
  • National Stock Exchange (NSE) publishes index level PE ratios based on standalone numbers and not consolidated numbers. It would be ideal to use consolidated numbers as many Nifty companies now have subsidiaries that have a significant impact on overall earning numbers. This has a much larger effect now than it would have had in yesteryears. And more importantly, this will matter more and more going forward. But NSE (as of now) continues to publish Nifty PE using its own set of criteria and decisions and sticks with standalone figures.
  • Its possible that at times, some of the sectors in index get far more weight than is prudent to give. And its also possible that at the very same time, their earnings may be unexpectedly high or low. If and when this happens, the index level earnings will be impacted accordingly due to higher-than-necessary sector weight – which in turn may skew the PE data at that point of time.
  • Similar to the point discussed above, it is also possible that at times, some (or few) individual index constituents might have high earning or market cap at an individual level(s) which might, to some extent, skew the PE data at the index level as well. The possibility of this happening is rare but still non-zero as the period under consideration is generally long term here.
  • Caution – Never make any investment decision based on just one or two ‘average’ indicators (here’s Why?) At most, treat these heat maps as broad indicators of market sentiments and a reference of market’s historical mood swings.

So here are the Nifty 50 Heat Maps…

Historical P/E Ratios – Nifty 50 (Monthly Average)

Historical Nifty PE 2019 July

P/E Ratio (on the last day of July 2019): 27.42

And if we were to look at the movement of Nifty’s PE in the last 12 months, then here is a graph depicting the same:

Nifty 12 Month PE Trend 2019 July

Now, let’s have a more detailed look at how the last 12 months have panned out when it comes to Nifty movements and its implications (alongwith earnings’) on PE ratio of the index.

I suggest you spend some time on the table below (which shows month-wise data cuts) to gauge its importance in highlighting the trends in the last 1 year:

Nifty Price PE Trends 12 Months Aug 18 Jul 2019

Now from month-wise depiction, let’s have a look at more aggregate time periods in the last few months. Let’s analyse the above-highlighted data points when period under consideration in aggregated to 3-months and 6 months (plus a 1-previous month for more comparative analysis):

Nifty Price PE 1 3 6 Month Trends Jul 2019

Now with PE of Nifty50 analysed in various cuts, let’s move ahead to the analysis of P/BV and Dividend Yields of the Nifty50

Historical P/BV Ratios – Nifty 50

Historical Nifty Book Value 2019 JulyP/BV Ratio (on the last day of July 2019): 3.45

Historical Dividend Yield – Nifty 50

Historical Nifty Dividend Yield 2019 JulyDividend Yield (on the last day of July 2019): 1.33%

That was all about Nifty50 – the more popular bellwether index of India.

Now let’s do a historical analysis of the larger space, i.e. Nifty500 companies…

As the name suggests, Nifty500 is made up of top 500 companies which represent about 96.1% of the free-float market capitalization of the stocks listed on NSE (March 2019). Nifty50, on the other hand, is an index of 50 of the largest and most frequently traded stocks on NSE. These represent about 66.8% of the free-float market capitalization of the NSE listed stocks (March 2019).

So obviously, Nifty500 is a much broader index than Nifty50.

So let’s see…

Historical P/E Ratios – Nifty 500

Historical Nifty 500 PE 2019 JulyP/E Ratio (on the last day of July 2019): 29.25

Historical P/BV Ratios – Nifty 500

Historical Nifty 500 Book Value 2019 July

P/BV Ratio (on the last day of July 2019): 3.14

Historical Dividend Yield – Nifty 500

Historical Nifty 500 Dividend Yield 2019 July

Dividend Yield (on the last day of July 2019): 1.29%

You can read the previous update here. The State of Markets section has also been updated with new Nifty heat maps (link).

For a detailed analysis of how much return you can expect depending on when the actual investments have been made (at various P/E, P/BV and Dividend Yield levels), it is strongly suggested that this article may be read and referred to regularly:

NPS Calculator Excel-based (Free) Download

If you invest in NPS (National Pension System), then I am sure you would be interested in knowing the following:

  • How much money you can accumulate in NPS by retirement?
  • How much NPS retirement corpus will you have?
  • How much tax-free withdrawal is allowed from NPS at retirement?
  • How much will be your retirement NPS pension?

For answering such questions, I have created a small free excel NPS calculator. This NPS calculator acts as a tool that you can use to estimate the NPS retirement corpus and monthly pension when you retire at 60.

You can call it NPS maturity Value calculator or NPS family pension calculator or National Pension Scheme calculator or NPS monthly pension calculator too.

It is a simple, easy-to-use and can be used as a NPS Pension Calculator as well. It’s a basic version and hence, illustrates only the following:

  1. NPS Corpus accumulated by retirement (age 60)
  2. Tax-Free Lumpsum withdrawal available
  3. Pension amount or annuity payable on retirement (after the purchase of annuity using minimum 40% of the NPS corpus accumulated)

Under latest NPS rules 2019-20, you are not allowed to withdraw the entire amount at maturity and need to purchase annuities worth at least 40% of your accumulated NPS corpus at retirement. The remaining 60% of the corpus can be withdrawn tax-free. This annuity purchased is the source of pension income after retirement. Hence, once you are able to estimate your final retirement NPS corpus, you can then easily estimate post-retirement monthly pension using prevalent annuity rates.

So here is the link to download:

Download (Free) Excel NPS Pension Calculator

 

Note – The new pension scheme calculation formula is already embedded in the NPS calculator excel sheet but please remember that the calculations and figures shown by the NPS calculator are indicative only. Is this NPS Tier 1 and Tier 2 calculator? You can say that. Or just assume that Tier 1 (which is locked-in till retirement) is the one being used mostly for actual retirement planning.

This National Pension Scheme Calculator gives a reasonable idea of how much retirement savings can you do using NPS. A lot of people have been looking to download NPS excel calculator and hence, will find this useful as a pension calculator.

As you already know, the government gives extra tax benefits via additional deduction of up to Rs 50,000 per year to NPS investors under Section 80CCD (1B). This benefit is in addition to the Rs 1.5 lac limit of Section 80C.

By investing Rs 50,000 per year in NPS (or less than Rs 5000 per month in NPS), you can create a large enough corpus by the time you retire (assuming you start saving early). And since NPS can give market-based returns if you choose correct asset allocation between Equity, Corporate Bonds and Government Securities, it is a fairly decent product to have in your retirement savings portfolio.

With this NPS calculator, you will know how much Pension and tax-free lump sum amount you will get at retirement at 60.

As for the NPS Calculator Inputs, you need to provide the following:

  • Your current age (assumed you start investing at this age)
  • Retirement Age – fixed here at 60
  • Monthly NPS contribution
  • Annual increase in monthly contributions
  • Asset Allocation of NPS portfolio (to be provided for Equity, Government Bonds and Corporate Bonds)*
  • Starting Corpus if any (if you put lumpsum at the start of NPS)
  • Lumpsum withdrawal at retirement (can be between 0% to 60%)
  • Amount used for Annuity Purchase (can be between 40% and 100%)
  • NPS Annuity Rate % during the post-retirement period

* With regards to the choice of asset allocation in NPS, the NPS has 2 broad Investment options:

Active – Under NPS Active option, you decide how much to invest (exact percentages) in each asset (and their schemes). As of now, there are 4 asset classes:

  • Asset class E – Equity and related instruments
  • Asset class G – Government Bonds and related instruments
  • Asset class C – Corporate debt and related instruments
  • Asset Class A – Alternative Investment Funds

The total allocation across E, G, C and A asset classes must be equal to 100%. And the maximum permitted Equity Investment is 75% of the total asset allocation till the age of 50. Post that, the upper cap reduces by about 2.5% every year to 50% at the age of 60.

Auto – Under NPS Auto option, fund allocation takes place automatically. This option is best for those subscribers who do not have the required knowledge to manage their NPS investments. In this option, the investments are made in life-cycle funds and depending on the risk appetite of NPS Subscriber, there are three options available within ‘Auto Choice’:

  • Aggressive – LC75 – Aggressive Life Cycle Fund: This Life cycle fund provides a cap of 75% of the total assets for Equity investment. The exposure in Equity Investments starts with 75% till 35 years of age and gradually reduces and goes down to 15% by the age of 55 and beyond.
  • Moderate – LC50 – Moderate Life Cycle Fund: This Life cycle fund provides a cap of 50% of the total assets for Equity investment. The exposure in Equity Investments starts with 50% till 35 years of age and gradually reduces and goes down to 10% by the age of 55 and beyond.
  • Conservative – LC25 – Conservative Life Cycle Fund: This Life cycle fund provides a cap of 25% of the total assets for Equity investment. The exposure in Equity Investments starts with 25% till 35 years of age and gradually reduces and goes down to 5% by the age of 55 and beyond.

That was about the NPS portfolio allocation between various assets and schemes.

Now here is what the National Pension Scheme Calculator (or NPS calculator) calculates and shows as output once the inputs are provided:

  • The total amount invested (contributed) during the accumulation phase
  • The total corpus accumulated
  • Amount available as one-time tax-free withdrawal
  • Amount used for Annuity Purchase
  • Monthly Pension Amount during retirement years

Like any other investment product, NPS also benefits from compounding. So more the invested money, the more the accumulated amount and the larger would be the eventual benefit of the accumulated pension wealth. To find out the Best NPS Funds Managers (2019 2020) and to check returns generated by NPS schemes, please check out this link – NPS Scheme Fund Manager Returns.

Here again, is the link to download the calculator:

Download (Free) Excel National Pension Scheme Calculator

 

NPS is one of the few products that have been made specifically for retirement savings. Other good ones being PPF (Public Provident Fund Interest Rates and How to become a PPF Crorepati and Free PPF Calculator), EPF and doing regular long term SIP in Equity Funds. The investment in NPS also offers tax benefit under Section 80C (within Rs 1.5 lac per year) and extra benefit under Section 80CCD (1B) upto Rs 50,000 per year. This makes NPS as an attractive retirement solution for many people who are looking for NPS tier 1 and tier 2 tax benefits. As for NPS Tier 1 and Tier 2 which is better? Since Tier 1 has a lock-in practically till retirement, its better option for retirement planning. Tier 2 is best for non-retirement related savings – which can be for other financial goals as well.

But it must be noted that whether it should be the only retirement product that you invest in or not is debatable. There is a case for investing separately in equity funds for retirement as well.

Hopefully, this excel based NPS Pension calculator will help you understand the retirement savings product NPS better and also act as a decision-making tool to make informed investment decisions about how much to invest in NPS for retirement savings.

Strong Early Returns Vs Strong Late Returns

You already know that the markets don’t go up or down in straight lines. What this means is that if an investor gets an average return of 12% in 10 years, it doesn’t mean that he will get:

12%, 12%, 12%, 12%, 12%, 12%, 12%, 12%, 12%, 12%

It instead means that he will get something like this:

-5%, 22%, 4%, 13%, -17%, 57%, 10%, 19%, -12%, 29%

Or let’s put it this way:

Average Vs Actual Returns in Stock Markets

Related to the actual sequence of return an investor gets in real life, I came across an interesting post that talks about how the end-portfolio size differs depending on whether the investor gets strong early returns vs strong late returns.

What is the difference you may ask…

This simply means that in one case, you get good returns in early years while in other, you get good returns in later years.

Does it matter?

Yes indeed… as you will see soon in the remainder of this post.

Let’s consider a simple example.

Suppose you are 30-year old planning to save for retirement at 60.

You have decided to invest Rs 20,000 per month or let’s say Rs 2.4 lakh every year for the next 30 years.

Now consider 2 different cases:

  • Good Later Years – You earn 7% every year in the first 15 years and 14% every year during the next 15 years, on your investments.
  • Good Early Years – You earn 14% every year in the first 15 years and 7% every year during the next 15 years, on your investments.

What will be the value of your portfolio after 30 years in either case?

  • Rs 5.81 crore after 30 years (for sequence 7% followed by 14%)
  • Rs 3.95 crore after 30 years (for sequence 14% followed by 7%)

That’s a large difference of about Rs 1.86 crore!

And that too for the same ‘average return’ during the 30 year period. Isn’t it?

Many of you may have guessed the reason.

It is because of the Sequence of Returns you get. That is, the order of annual returns that your portfolio is subjected to.

Strong early vs Strong Late returns

In the first case (where portfolio grows to a larger Rs 5.81 crore), you get strong late returns – due to which, a bigger corpus earns better returns (14%) in the later years. Whereas in the second case (where portfolio grows to a comparatively smaller Rs 3.95 crore), you get strong early returns – due to which, a smaller corpus earns better returns (14%) early on while the bigger corpus earns lower returns (7%) in later years.

And how do these two cases compare with the actual average return (10.5%)?

Here is how different the 3 scenarios end up looking, even though all have the same exact average returns:

Strong early vs Strong Late vs Average returns

And this is exactly what I wanted to highlight.

The sequence of returns that investor gets has a big impact on the final overall portfolio size.

You may be hoping to get a portfolio size based on your average return assumption. But the actual size may vary even though average returns are same, due to a different sequence of returns your portfolio undergoes. Averages and Actual differ (River Depth example).

And let’s take this a step further.

Let’s see how the actual investment in Sensex in the last 20 years fared when compared to the reverse sequence of returns.

In this scenario analysis, Rs 2.4 lakh (or Rs 20,000 per month) is invested in Sensex every year during the last 20 years. The sequence of returns that are given in the second column in the image below are the actual Sensex returns in the last 20 years. The value of portfolio changes as depicted by the green line in graph below. Also, a portfolio that runs on the basis of the reverse Sensex returns (the returns have been reversed in the third column) is shown as the blue line in the graph. 

Sensex last 20 years actual vs reverse returns

As you can see, depending on the different sequence of returns considered (one real other reversed), the portfolio value varies every year and also, the final values are different.

So the sequence of returns does matter a lot.

All said and done, can anything be done for this?

To be honest, it’s difficult.

You don’t get to decide what sequence of market returns you get in future.

I repeat.

You don’t get to decide what sequence of market returns you get in future.

This simply but unfortunately means that we have no control over the sequence of returns in the markets.

It is possible that some of you may get better markets early in your investing career and worse ones later. Or if powers above favour you, then you may have not-so-great market returns during initial years but super returns in later ones. This is the very reason why young investors should pray for bad markets in initial years. It may be painful and may not be for everyone, but it’s a wonderful thing for real long-term investors.

But even though we cannot control the sequence of returns, we can manage the risk to some extent.

At times, using market valuations as an indicator can help you estimate the possibility of a weak or a strong market in the coming years and rebalance your portfolio accordingly. By doing this, only a part of the portfolio may be exposed to market returns when required tactically.

This is not exactly a perfect strategy but works often as is proven by this detailed analysis of Market Valuations Vs Future Returns.

So to more practically manage the Sequence of Return Risk, you should be slightly conservative in your return expectations. It’s better to have lower return expectations and save more than having higher return expectations and saving less but getting shocked later on when it is already late to do anything.

State of Indian Stock Markets – February 2019

This is the February 2018 update for the State of Indian Stock Markets and includes historical analysis and Heat Maps of Nifty50 as well as Nifty500‘s key ratios, namely P/EP/BV ratios and Dividend Yield.

Please remember that these numbers are averages of P/E, P/BV and Dividend Yield in each month. Neither Nifty50 heat maps nor Nifty500 heat maps show the maximum or the minimum values for each month. Also, note that NSE publishes PE ratios based on standalone numbers and not consolidated numbers (Read why this may matter too).

Caution – Never make any investment decision based on just one or two ‘average’ indicators (Why?) At most, treat these heat maps as broad indicators of market sentiments and a reference of market’s historical mood swings.

So here are the Nifty 50 Heat Maps…

Historical P/E Ratios – Nifty 50 (Monthly Average)

 

Historical Nifty PE 2019 February

P/E Ratio (on the last day of February 2019): 26.32 P/E Ratio (on the last day of January 2019): 26.26

The 12-month trend of P/E has been as follows:

 

Nifty 12 Month PE Trend February 2019 And here are the average figures of Nifty50’s PE for some recent periods:

Nifty Average PE Trends February 2019

 

Historical P/BV Ratios – Nifty 50

 

Historical Nifty Book Value 2019 February

P/BV Ratio (on the last day of February 2019): 3.41 P/BV Ratio (on the last day of January 2019): 3.37

Historical Dividend Yield – Nifty 50

 

Historical Nifty Dividend Yield 2019 February

Dividend Yield (on the last day of February 2019): 1.25% Dividend Yield (on the last day of January 2019): 1.25%

Now, to the historical analysis of Nifty500 companies…

As the name suggests, Nifty500 is made up of top 500 companies which represent about 95% of the free float market capitalization of the stocks listed on NSE (March 2017).

Nifty50 on other hand is an index of 50 of the largest and most frequently traded stocks on NSE. These represent about 63% of the free float market capitalization of the NSE listed stocks (March 2017).

So obviously, Nifty500 is comparatively a much broader index than Nifty50.

Historical P/E Ratios – Nifty 500

 

Historical Nifty 500 PE 2019 February

P/E Ratio (on the last day of February 2019): 29.23 P/E Ratio (on the last day of January 2019): 29.13

Historical P/BV Ratios – Nifty 500

 

Historical Nifty 500 Book Value 2019 February

P/BV Ratio (on the last day of February 2019): 3.17 P/BV Ratio (on the last day of January 2019): 3.15

Historical Dividend Yield – Nifty 500

 

Historical Nifty 500 Dividend Yield 2019 February

Dividend Yield (on last day of February 2019): 1.17% Dividend Yield (on last day of January 2019): 1.16%

You can read the previous update here. The State of Markets section has also been updated with new Nifty heat maps (link).

For a detailed analysis of how much return you can expect depending on when the investments have been made (at various P/E, P/BV and Dividend Yield levels), please have a look at these 3 posts:

State of Indian Stock Markets – January 2019

This is the January 2018 update for the State of Indian Stock Markets and includes historical analysis and Heat Maps of Nifty50 as well as Nifty500‘s key ratios, namely P/EP/BV ratios and Dividend Yield.

Please remember that these numbers are averages of P/E, P/BV and Dividend Yield in each month. Neither Nifty50 heat maps nor Nifty500 heat maps show the maximum or the minimum values for each month. Also, note that NSE publishes PE ratios based on standalone numbers and not consolidated numbers (Read why this may matter too).

Caution – Never make any investment decision based on just one or two ‘average’ indicators (Why?) At most, treat these heat maps as broad indicators of market sentiments and a reference of market’s historical mood swings.

So here are the Nifty 50 Heat Maps…

Historical P/E Ratios – Nifty 50 (Monthly Average)

P/E Ratio (on the last day of January 2019): 26.28
P/E Ratio (on the last day of December 2018): 26.26

The 12-month trend of P/E has been as follows:

And here are the average figures of Nifty50’s PE for some recent periods:

Historical P/BV Ratios – Nifty 50

P/BV Ratio (on the last day of January 2019): 3.37
P/BV Ratio (on the last day of December 2018): 3.40

Historical Dividend Yield – Nifty 50

Dividend Yield (on the last day of January 2019): 1.25%
Dividend Yield (on the last day of December 2018): 1.24%

Now, to the historical analysis of Nifty500 companies…

As the name suggests, Nifty500 is made up of top 500 companies which represent about 95% of the free float market capitalization of the stocks listed on NSE (March 2017).

Nifty50 on other hand is an index of 50 of the largest and most frequently traded stocks on NSE. These represent about 63% of the free float market capitalization of the NSE listed stocks (March 2017).

So obviously, Nifty500 is comparatively a much broader index than Nifty50.

Historical P/E Ratios – Nifty 500

P/E Ratio (on the last day of January 2019): 29.13
P/E Ratio (on the last day of December 2018): 29.61

Historical P/BV Ratios – Nifty 500

P/BV Ratio (on the last day of January 2019): 3.15
P/BV Ratio (on the last day of December 2018): 3.20

Historical Dividend Yield – Nifty 500

Dividend Yield (on last day of January 2019): 1.16%
Dividend Yield (on last day of December 2018): 1.14%

You can read the previous update here. The State of Markets section has also been updated with new Nifty heat maps (link).

For a detailed analysis of how much return you can expect depending on when the investments have been made (at various P/E, P/BV and Dividend Yield levels), please have a look at these 3 posts:

Nifty P/E Ratio & Returns: Detailed Analysis of 20-years (1999-2019) Updated

Like previous years, I have once again revised the Nifty PE-Ratio & Return analysis to include fresh data (up to December 2018). Now, this analysis has data spanning from early-1999 to late-2018, i.e. full 20 years.

This analysis uses one simple valuation metric (P/E Ratio of Nifty50) and attempts to correlate it to the returns achieved across various time periods (rolling-periods ranging 3 to 10 years) when investments were made at different PE levels of the index.

The purpose of this analysis is simple.

To arrive at some sort of conclusion and see how well or not-so-well correlated are the two things – the market’s current valuation and its future returns.

This time, I have tried to make this analysis more comprehensive and have included a few additional updates that weren’t part of the previous years’ PE vs Return analysis. So even if you have read the earlier ones, I suggest you go through this one again. My guess is that you will find it incrementally useful.

But before we get to the findings, let me say this upfront that this is not a sure-shot method to make money.

Just because we can find some trends in past data doesn’t mean that the same trends will be replicated in future. Markets are dynamic and the history is no guarantee of the future. In markets, the history is known to rhyme but it is never exactly the same.

The sole purpose of this analysis is to highlight that there exists a relation between the broader market valuations and returns you can achieve.

If you buy low (valuation wise), chances of earning good returns increase and vice versa.

How to Analyse PE Vs. Returns?

What I have done is that I have calculated returns earned on investments made at all Nifty PE levels starting from the year 1999. The time periods of return calculations are 3-year, 5-year, 7-year and 10-years.

Let’s use a simple example to understand this.

Suppose you had invested money in the index Nifty50 on 24th-February-2004 when its PE was 19.97 (actual data).

Now in the next 3-year, 5-year, 7-year and 10-year period (starting from 24th February 2004), the CAGR returns would have been 29.3%, 8.5%, 17.0% and 13.0% respectively.

Using the above-described approach, I have done the return analysis for each and every trading day since 1st January 1999 (the day from which the Nifty PE data is available publically). Obviously, 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 the analysis of 3-year returns. Same is the case with 5, 7 and 10-year studies. For example, data for 15-July-2013 is used for calculating 3-year return (as data is available for July-2016) and 5-year return (as data is available for July-2018). But the same is not used for 7-year and 10-year returns as data is naturally not available for July-2020 or July 2023 (at the time of writing of this study).

To simplify the findings, I have been grouping Nifty PE into 5 groups earlier.

But to provide more granular data this time, I have decided to present my finding in a larger 7-grouping set.

Nifty-50 PE Ratio and Investment Returns

The findings are based on 4243 data points for 3-year analysis, 3751 data points for 5-year analysis, 3250 for 7-year analysis and 2509 for 10-year analysis.

And here is what has been found after updating the dataset:

Nifty PE Ratio 1999-2018 Detailed Grouping

Due to the choice of intervals in the PE range, the figures differ slightly if I revert back to the old PE-range choice. Here is the same summary on the basis of the old grouping:

Nifty PE Ratio 1999-2018 Grouping

Essentially, both tables tell you the same thing – when you invest at low PEs, your expected future returns are comparatively higher.

Remember, these figures are based on past data (of the last 20 years).

The trends no doubt are easily evident here. But they may or may not repeat in future. There are no guarantees that the future returns will follow similar patterns.

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.

But the above data set and relying on a common-sense based approach to investing tells that investing at low PEs is difficult but profitable.

So let’s say 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 18% respectively! Unfortunately, it’s very rare to find days where Nifty is trading at such low valuations.

On the other hand, if investments were made when Nifty50 was trading at PE ratios of above 24 and above 27 (which are the supposed overvalued territories), the chances of earning decent returns in (atleast) near term are pretty low. 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 (in times of crisis). This is what the 3 C’s of proper investing is all about too. 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.

Before we further slice and dice the dataset to find out more interesting things, let me highlight a few important points about using index data here:

  • The Nifty PE data is published by NSE (here) and is currently based on Standalone numbers. This means that actual earnings (that includes those from subsidiaries, etc.) in consolidated figures are higher than what the standalone numbers would suggest. And that also means that current actual PE may not be as high as that suggested by the standalone ones.
  • The constituents of Nifty50 keep changing. The index management committee that is responsible for maintenance of the index regularly brings in and moves out companies from the index. The Nifty composition of 2008 was quite different from that of 2018. Similarly, the index composition of 1999 might also be very different from that of 2008 and 2018. Try to understand it like this. If the index is made up primarily of companies that are low PE-types, then index at the overall level will tend to have low-PE. Whereas if the index is made up of high-PE companies, it will tend to have a high PE. So actual definition of high and low PE will be different for both type of companies, and so in turn for the index. A PE of 15 for a low-PE company might be very high whereas for a high-PE company might be very low. This is an important factor that should be kept in mind. I have addressed this to some extent in the latter part of this analysis by comparing returns while changing the periods under consideration from 20 years to 15 and 10 years.

Moving on, let’s address another important aspect here:

Risks when dealing with Average Returns

The table above gives a very clear relation 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, let’s 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.

To counter this, we need to analyze a few more things. So…

Adding More Data points to PE-Analysis

A better picture can be painted if in addition to the average returns, we also consider the following:

  1. Maximum returns during all the periods under evaluation
  2. Minimum returns
  3. Standard deviation
  4. Time spent in at a given valuation band

Have a look at the tables below now:

Nifty PE Ratio 3 Years Average

I want to spend some time here to highlight what all this means. I will also visually depict this using a small graph.

In the graph below, I have plotted PE ratios on X-axis and 3-year CAGR returns on Y-axis for all available data points in the last 20 years. As you can easily see, the trend is clear – returns are higher when investment happens towards lower PEs.

Nifty PE Return 3 Year Scatter

But you don’t always get the average returns that the preceding table shows. You can get anywhere between the MAX figure and MIN figure and the difference is huge.

Sounds confusing?

Let me try to segregate the above chart into PE-bands to highlight this:

Nifty PE Return 3 Year Detailed Scatter

As you can see, within each PE band, the actual returns are all over the place.

Focus on the first green block of PE12-15 band.

The red circle is the position of average return (38.7%).

But as the two text bubbles show, the Max and Min returns are very different from the average returns. Refer to the table above and you will find that max is about 58.1% and min is about 5.9%. And all this with a standard deviation of 14.6%.

What this means is that even though the average figure might tell you something, the actual returns can vary a lot.

I hope you get the drift of what I am trying to show you here…

Let’s now see the data for 5, 7 and 10-years:

Nifty PE Ratio 5 Years Average

Nifty PE Ratio 7 Years Average

Nifty PE Ratio 10 Years Average

Spend some time studying the above tables.

By now, you would be clearly noticing that there are big differences between the minimum and maximum returns for almost all periods.

So even though the average return figures will tell you one thing, the fact is that the actual returns that you get will depend a lot on when exactly you enter the markets and what happens afterwards.

Two different investors entering the markets at same valuation levels (let’s say PE=17.5) but at different times would have got 7-year returns ranging from 7.7% to 26.1%. Check the table for 7-year return above and you will know how.

For a lack of better word, the difference is shocking.

What this means is that even though the average return for 7-year period in the example taken above (PE17.5) is 16.2%, the actual returns have ranged from 7.7% to 26.1%.

This is equity investing for you. Welcome!

The statement that I made a couple of paragraphs before, ‘returns that you get will depend a lot on when exactly you enter the markets’, does sound like trying to time the markets. But this is a reality. I cannot deny it. For those who can, 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 analysis), 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 Avg. Returns. 🙂

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

Analyzing standard deviation tells you – how much the actual return can vary from the average returns. So higher the deviation, higher will be the variation in actual returns. For completing the scatter analysis, here are the 3 remaining scatter plots for 5, 7 and 10-year returns:

Nifty PE Return 5 Year Scatter

Can You Catch the Markets at Right Investible PE?

Ideally, and armed with the 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. It’s like a pendulum – it keeps oscillating between overvaluation and undervaluation. It is almost never perfectly valued.

So should you wait to only invest at low PEs? Though it might make theoretical sense to do so, it is still very difficult to wait for low PE markets. And extremely low PEs are extremely rare.

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

Nifty Time Spent PE Levels

Look at the column ‘Time spent by the Nifty in PE band’ at Below-PE12 levels.

It is just about 1.5% of the time since 1999 that markets spent below PE12. This is extremely rare.

For common investors, it’s almost impossible to wait for such days. In fact, such days might be spaced several 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). It is not perfect (like buy low sell high) but it is your best bet given all the constraints. And once your portfolio grows in size, make sure you rebalance it periodically to adhere to proper asset allocation and manage risks appropriately.

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 OK-ish to good enough, even when one invests at high PEs.

Have a look:

Long Term Investing PE Returns High

So, even if an investor puts his money in the index at PE above 24, the historical average returns are more than 8 to 10%. That’s quite ok I guess. Atleast it’s much better than being in losses.

The longer you stay invested, higher are the chances of not losing money in stock markets…even if you have entered at comparatively higher levels.

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

Now let’s compare this with someone who is thinking to invest at high PEs (above 24) for less than 3 years. Have a look at the table below:

Short Term Investing PE Returns Low

There are un-ignorable chances that the person will not do well. Chances of losing money are fairly high if you see the average figures and Minimum returns for PE24-27 and PE>27 bands.

But let me touch upon an important point now.

Will this Result change if only the more Recent Data (and not last 20 years’) is considered?

That is no doubt an interesting and fairly valid point.

In last few years, it does seem (and I repeat ‘seem’ – may be due to our recency bias) that average PE levels are much higher than what they used to be in earlier years. The Reason for this may be many:

  • One of them can be that unlike earlier years, the constituents of Nifty50 are companies which in general have high PEs. So obviously there is a case for slightly higher average PE figures as the new normal.
  • The PE figures are based on standalone numbers of constituent companies of the index. If we consider the consolidated numbers, then chances are that the earning would be higher and lead to lower (calculated) PE figures. Earlier, the difference between standalone and consolidated figures wasn’t much as Indian companies did not have large subsidiaries that would distort the figures. But as Indian companies grow and so do their subsidiaries, the consolidated figures will be incrementally bigger than standalone ones.

To accommodate these facts, it makes sense to give more weight to consolidated figures. But NSE publishes data on the basis of standalone numbers till now. So we live with it for time being.

Another option is to reduce our period in consideration from 20 years to a more recent one – like last 10 or 15 years – where the comparative difference in the nature of index constituents in not as stark as what might be (like) 20 years ago.

Ofcourse the number of data points would reduce. But we can atleast have a slightly more relevant comparison if not a perfect one. So I wanted to try out the above analysis with different (but more recent time periods).

As a first case, let’s consider the last 10 years data, i.e. Jan-2009 to Dec-2018.

Do note that the beginning of this period coincides with the depth of the last severe bear market. So numbers will change. Let’s see:

Nifty PE Return Analysis 3 & 5 Year (10 Year)

You would agree that the trend remains the same. At higher valuations (PE), the future returns reduce.

I have not done the analysis for 7- and 10-year period as the period under consideration (i.e. 10 years) is too small to have any sufficient number of data points for the 7- and 10-year analysis.

But how does this compare with our previous analysis where period under consideration was 20 years? Let’s see:

Nifty PE Return Analysis 3 & 5 Year (10 20 Year)

Spend some time comparing the above 2 tables. The left one is based on the analysis of the last 10 years and the right one is based on the analysis of the last 20 years.

The basic conclusion once again is the same.

But the extent of these returns changes when we the period under consideration is changed.

How?

Focus on the red arrows for now. The returns for PE12 case moderate from 38.7% to 23.0% (for 3-year) and from 29.2% to 18.4% (for 5-year) when we change the analysis period from 20-year to 10-year.

Now focus on the green arrows. The returns for PE18 and above (i.e. PE18 to 21 to 24 to 27 and beyond) increase somewhat for both 3-year and 5-year analysis when we change the analysis period from 20-year to 10-year.

This might be getting slightly number heavy but what I want to highlight here is that depending on the data set I chose, the return figures change to some extent (increase and reduce for different PE bands).

The overall conclusion still remains the same. But the expectations need to be revised when we give more weight to the recent past (last 10 years) than what we gave to the full last 20-year period.

You might feel that by choosing the last 10-year period, I am missing out on the Bull Run between 2004 and 2007. And rightly so.

So let’s consider a different period now:

The last 15 years (from Jan 2004 to Dec-2018).

This period takes into account the great bull run of 2004-07, the big crash of 2008-09 and the upmove since then 2009-2018.

Let’s see what the data tells here:

Nifty PE Return Analysis 3 & 5 Year (15 Year)

I may sound repetitive here – but the overall trend is still the same.

But once again, what changes though is the extent of returns in each case.

Let’s now compare 3-year and 5-year investment returns for each of the PE bands when different analysis periods of 20, 15 and 10 years are considered:

Nifty PE Return Analysis 3 & 5 Year (10 15 20 Year)

As is clearly evident, the figures moderate if we reduce the analysis period to data of the last 10 years instead of 20 years.

To be fair, there is no perfect answer as to which one should be used or which shouldn’t be. But this moderation analysis proves that we should revise our expectations to more rational levels. Due to various factors (like increasing difference between standalone and consolidated earnings and PE figures, change in index constituents and their normal valuations), we may have to keep a range of outcomes in our mind when making investment decisions. It was never black and white. It was always grey. Now it has even more shades of grey!

For the sake of completeness, I am tabulating the full findings for everything below. This includes 3-year, 5-year, 7-year and 10-year Nifty return analysis compared across various PE levels and after considering data for different sample space of 10, 15 and 20 years:

Nifty PE Return Analysis 3 5 7 10 Year

Also, note one more thing – this analysis is based on one time investing at specified PE levels.

If you are a SIP investor, then returns will obviously vary as your investment would be spread out across time and PE ranges. You cannot and should not expect to receive lumpsum-like returns on your SIP investments. The mathematical concept of average doesn’t allow that to happen.

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 the overall markets. It tells you when the market is overheating and that you should take cover (reduce equity in line with asset allocation). This, in turn, helps 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 stories and need more in-depth analysis.

I have been doing this analysis now for several years. If you wish to access old ones done in the year 2017, 2016, 2015, 2014, 2013 and 2012, then please access the archives. But I think its best to stick with this current analysis as it’s the latest and most comprehensive one till date.

I regularly update PE and other ratios of Nifty50 and Nifty500 on State of the Indian Markets page.

What Should You Do as a Common Investor?

I am assuming that you are not Warren Buffett. 🙂 But jokes apart, the 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 a regular disciplined way of investing (easily achievable through MF SIPs). A proper way to do it is to first find your real life goals that require money (use this free excel) and then stick to Goal-based Investing. This is more than enough to begin with.

And once your corpus size grows, you should regularly rebalance your portfolio to de-risk it when needed and to position it for better risk-adjusted returns in future.

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

This is easier said than done but this is what really works in the market.

To sum it up…

There is a reasonable (but not guaranteed) correlation between the trailing PE and Nifty returns. And this study proves it and provides some useful insights. If we were to go by the historical data, the Nifty delivers higher return (in long-term) whenever investment is made at low PE ratios. On the other hand, it tends to deliver low to negative returns whenever investment is made at high PEs and when the investment horizon is short. You as an investor can use this insight as a backdrop to take your investments decisions.

 

I hope you found this detailed and comprehensive PE-Return analysis useful.

I will try to revise this study with new data points and other insights as and when practically feasible.