Nifty is close to all-time high but here is why you should not stop investing

Published: November 7, 2020 at 1:31 pm

Last Updated on December 29, 2021 at 5:50 pm

On Nov 6th Nifty closed at 12263 within striking distance of its Jan 14th 2020 close of 12362, something that no would have believed a few months ago when on March 23rd we saw the biggest intraday fall and the  10-year Nifty SIP Return fell to 2.3% and14-year SIP Return to 5%. In spite of this, here why we think you should not stop investing in equity.

Two reasons. One, as we recently saw Nifty PE was at an all-time high but the PB was still reasonably valued with respect its long-term average. The second one is the market imbalance we had referred to earlier: Return difference of Nifty 50 vs Nifty 50 Equal-weight index at an all-time high! This was seen in Dec 2019 but had started as we shall below quite a while ago.

By market imbalance, we are referring to a marked difference in the returns of Nifty 50 and Nifty 50 Equal-weight. As readers may be aware, the Nifty 50 is a market capitalization based index with just a few stocks accounting for the bulk of the weight.  On the other hand, the Nifty 50 equal weight has equal exposure to all 50 stocks.

Shown below is a plot of Nifty 50 TRI (green), Nifty 50 Equal-Weight TRI (black) and Nifty 50 Equal-Weight divided by Nifty 50 in red (right axis).  An increase in this ratio has corresponded to market up moves. Meaning all Nifty stocks have moved up. A fall in the ratio points to an asymmetry: top Nifty stocks have gained more than the rest of the index.

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plot of Nifty 50 TRI (green), Nifty 50 Equal-Weight TRI (black) and Nifty 50 Equal-Weight divided by Nifty 50 in red (right axis)
Plot of Nifty 50 TRI (green), Nifty 50 Equal-Weight TRI (black) and Nifty 50 Equal-Weight divided by Nifty 50 in red (right axis)

The long thin arrow represents the gradual fall in N50EW/N50 ratio post the 2008-crisis recovery! We saw this in our recent study: Active mutual funds struggle to beat Nifty 50 for the last seven years! The downward arrow represents a sharp fall in the ratio since late 2017 when active fund underperformance became apparent in their star ratings.

Why you should not stop investing

Thanks to the Marc 2020 crash, the fall in the ratio has been visibly arrested (left arrow). If your financial goals are several years away, this is a great time to invest regardless of Nifty levels. Even if the ratio hovers just above one for some time to come or moves further down, it should eventually move up. When it does, if you have enough units or stocks, your fortunes could change.  Please do not wait for the right time to invest. It is probably the worst investing mistake you can make.

Where should I invest?

Although the above chart makes Nifty 50 Equal-Weight a tempting buy, it is simply too risky. The simplest way to reduce concentration risk of Nifty and yet remain a passive investor is to have some exposure to Nifty Next 50.  How much will depend on your risk appetite: See: Combine Nifty and Nifty Next 50 funds to create large, mid cap index portfolios. You can use this free tracking error report to choose these index funds: Three Nifty index funds with lowest tracking error (Nov 2020).


Annoucement: Equity Mutual Fund Performance Screener November 2020 is now available.

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