When is The Right Time to Invest in The Market?

Published by Sharekhan Education | June 26, 2021

When is The Right Time to Invest in The Market?

Timing the market does not seem to be as difficult as it seems. Much has already been spoken and written about timing the market. The outcome that most investors agree with is that timing the market is almost a fruitless exercise and should be avoided altogether. To a certain extent, we agree that timing the market is difficult but we tend to disagree on the fact that you cannot predict when the market is overvalued with a high probability of success, and when is it undervalued, to take an informed decision. The probability of success can be improved if the valuation of the market is read in conjunction with the flow of money into the market.

A common rule of thumb to gauge the right time to invest is to check the valuation of the market and compare it with a PE scale shown by IDFC mutual fund.

The above chart shows the net flow of money into the markets. The green area is the area with PE <16x. The yellow area is PE between 16-19x, and the red area is the PE > 19x. Essentially it means that the least amount of money c.1% flows in the market when the trailing twelve months (TTM) PE of the Sensex is <16x. A moderate amount of money c.19% flows in the market when the TTM PE of Sensex is between 16-19x and almost 80% of money flows in the market when TTM Sensex PE is >19x.

Now isn’t this paradoxical that when valuation is cheap less money flows into the market and when the valuation is high most amounts of money flows into the market? Actually it should be the opposite.

The recent COVID pandemic is proof to the point that when the market fell the TTM PE was >20x and when market rose TTM PE was <19x. This correlates precisely with the above PE scale and gives us an idea of when we should invest in the market. The best time to invest is when the PE ranges between yellow to green zone.

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