Investing Strategy for NIFTYBeES ETF
My objective of investing in index based ETF is to have a total return that is somewhat similar to the market performance as a whole. It also acts as my benchmark for other long term portfolios. As mentioned in earlier post, if I cannot beat the market by stock selection, I should just close my long term portfolio and invest everything in these index ETFs.
My initial thought process was I would be investing upto 30% of my long term portfolio into index funds. However, after spending some time reading and understanding the various available funds, I have come to realize that there is not much choice available to individual investors. This is not to say, I do not like ETFs. I am still a fan of ETF assuming that they are structured properly and have reasonable expenses. In general, most of the ETFs have low liquidity and high expenses. I do not want my investments to get stuck in the low liquidity funds.
As of now, I will continue to remain under allocated to index ETFs. I do not know what be would the targeted allocation. I will let readers know when I make a decision.
I have initiated a starter position in NIFTYBeES ETF. I would like to invest in this fund based on certain criteria. A best aspect about index fund is that investor does not need to make a stock selection. As we all know, index consists of bunch of stocks based on their market capitalization. It will fluctuate and it will be volatile. As an index investor you will own all the stocks (in some percentage) in the index. The value of the holdings will follow the index. No need to make stock selection makes it easy for us to invest. The only thing we need to worry about now is “when to invest”. I do not want to blindly use a time-based systematic process because it is likely that I may be buying at historically high valuations.
I am an investor who is happy to keep cash in savings (or short term FDs) rather than buy at higher valuations. But the question that still remains to be answered is “what is the valuation for the index”? At what valuation will I be comfortable to buy my positions? Is there a way to determine index valuation? If there is a method, how easy or elaborate it will be? Assuming one can calculate the valuations, how effective it will be? With all these fundamental questions, it becomes little complex and time consuming to determine index valuation. Therefore, instead of going into all these aspects, I plan on using a metric known as “relative PE”. Relative PE is calculated as follows:
Relative PE = Current PE ratio of the NIFTY index] / [historical 10 year average PE]
Do not invest when relative PE is more than 1.0. Invest only when relative PE is less than 1.0. The actual amount invested is a function of relative PE. The chart below shows the plot of relative PE over time.
Strategy for Index Investing
Let us take an example to understand this process better. I want to invest once a quarter. Consider I decide to put way Rs. 1000 monthly for index investment.
- Quarter 1: I accumulated Rs 3000 in three months waiting to be invested. If relative PE is 0.8, I buy 40% (Rs 1200) of my allocated investment. Rest I will continue to keep in cash.
- Quarter 2: I will have Rs 4800 (1800+3000). If relative PE is 0.5, I buy 100% (Rs 4800). If relative PE is 0.6, then I buy only 80% (Rs. 3840). Rest I keep it in cash.
- Quarter 3: repeat.
The advantage of this process is as follows:
- I am investing less when NIFTY is reaching closer to historical PE valuations. And I am investing more when NIFTY is going away from historical PE.
- I will have only four transaction fees in a year which is very much plausible than buying monthly.
- The most important is I will always have cash available to invest when it goes below historical valuations.
At this point in time, I do not plan to sell my index positions. This is because I am still in my wealth building and accumulation stage. The amount invested will be less. Over time, perhaps, in next 10 years or so, I will revisit and explore my exit strategy. Until then, it is only buying.
What are your thoughts? Do you use index investing with similar process?
historical PE for NIFTY, index investing strategy, NIFTY, NIFTYBeES, QNIFTY, relative PE, S&P CNX NIFTY, trailing current PE
I certainly use valuations as a means to tell me when to buy or sell, but have not invested in index funds yet. I am somehow not convinced about index investing. I don’t say that I can beat the market or any of that jazz, but I hate paying someone fees for stuff that I can do myself.
Hello Manshu,
Like you, I also hate paying fees to fund managers. And that’s the reason I don’t invest in mutual funds. Almost all of them take 2%+ fees, for doing nothing.
In my view, index is filled with bunch of good companies and bunch of bad ones. So essentially you are also buying crap companies with it.
The advantage of index investing is, it gives you a floor, and mechanism to average out. So when the fund expenses are 0.5%, atleast to me it makes sense to give it a thought to a certain allocation level. It is good vehicle, when an investor does not know about a given sector and wants to avoid stock selection. Plus, considering the future potential growth economy of Indian economy, I tend to think it would be a sure winner on 15+ years time scale. However, I wouldn’t do index investing for US markets.
Best Wishes,
What about investing in Junior Bees?
I am investing in the same along with Nifty Bees.
Buying at every dip of 200 points or more in
the sensex.
If one is buying for the long term 5 years or
More without any selling would it matter to
Wait for a relative P/E of less than 1?
Thanks
Hello N S,
Junior BeES is also potentially a good vehicle for mid caps. I wanted to focus on large caps.
Yes, in my thought process, it does matter. I hate to see my portfolio in red. If one keeps investing irrespective of valuation, longer term it will make an impact.
Why would you want to buy something that is historically at higher price?
Best Wishes,
Hi,
This is a very good strategy, but IF we look into the relative pe graph, most of the time we will be sitting on huge cash pile. For exapmle to invest more than 40% of your holding the windows that appears are very rare.60% cash is quite huge. Even going beyond 0.7 relative pe is even rare case. And you will never invest more than 80% of your holding from the past data.
Hello Swaroop,
As I mentioned, I am happy to keep my money in cash (i.e. savings or short term FDs).
It’s all about thought process and willingness to buy something at a given price. To me, I am not willing to pay a premium to buy something just for the sake of it. I like to invest with higher probability to be on “green side”.
Anybody who had continued to invest in index from Apr 06 to Oct 08, would still be in negative. So basically, three year returns would be flat to negative. Forget index, even in case of stock buying, I had zero purchases in that two year time frame. Come late 08 and early 09, I was happy to have cash to buy all the opportunities. In fact I wished I had more cash, because I missed on lot of good opportunities.
What’s wrong in keep cash? What I do not understand is instead of focusing on managing cash, why would one want to pay premium, and let someone else take the profit? Cash can be managed either by combining it with emergency holdings or by putting it in laddered FDs. Atleast it keeps up with the inflation and does not become negative?
I look for sure shot success, and if I have to wait, I will. Using a prudent thought based process, will always keep your portfolio in green.
Best Wishes,
Hi,
I got your point.
Also hwo often you calculate the Relative PE. If you can could you explain advantage of relative PE v/s investing based on Nifty PE.
You have mentioned about considering exit strategy at a later stage. But you have any idea about that as of now which you can share here. Then the description is complete and clear as crystal.
I really appreciate you effort for bringing up a blog as its important to spend time to manage wealth atleast 1% of the time spend on making the money.
Swaroop
Hello Swaroop,
I calculate once a month. Since my process is already set, it takes me less than 10 mins. to do so.
I do use NIFTY PE, please check the formula i mentioned in the article. I attempt to gauge where the current PE stands w.r.t. historicall PE.
Exit strategy, yeah, i do have plan. Current plan is not to sell for next 10 years. Keep investing as per the criteria.
Best Wishes
I agree with your last reply as I experienced -to get best reward risk should be less ( more value)as I experience -SIP not work always
I have one question Sir If it can be answered
Please update how to generate this graph as it looks very usefull I myself has generated a graph from 99 to till date there were 5 Peaks of nifty ranging from 12-13 P/E to 22 p/E ( some 60% upside potential-so I lakh converting to around 1o lakhs because of compounding)
but this looks more good to me
I have heard some buffet mechanism of Mcap/GDP ratio is it is less than .7 ( buy) more than 1.1 sell-Can you help in getting the same
hi, this seems to be a good strategy, how often do you plan on calculating relative PE?
If dollar depreciates as another blogger Rohit mentions on this blog, how will that affect indian markets
http://valueinvestorindia.blogspot.com/2009/11/whats-on-my-mind-nov-09.html
will the use of PE to make investment still make sense? becuase ruppee will increase and reduce corporate earnings.
thanks in advance.
Hello Roselin,
good question of dollar’s impact on Indian markets. I will read Rohit’s post and then try to sum up my thoughts in a separate post.
Best Wishes,
hi, my comment did not publish, do you censure or moderate comments?
Hi,
No, I do not censure or moderate. Since your comment included link, it is goes into moderation. I have to do that for spam protection.
All comments are welcome as long as they are related to the topic.
Best Wishes,
Hi TIPGuy,
I have a question for you. Did it occur to you that instead just basing the buy decision on relative PE, why not to also use relative PB and/or relative Divident Yield? I would like your opinion on this.
I am more keen on having strategy based on all PE, PB and DY. Offcourse it will be bit complicated to arrive at the decision points using all of these but I think it is worth playing with it. Could you please publish the graphs based on relative PB, DY like what you did for PE? Appreciate your toughts if you have already spend some time on these lines.
Thank you,
Sachin
Hello Sachin,
Good questions. I think I know the downside of these methods, and a separate post would make sense.
DY is not a good parameter. Because there are too many variables. It is a good indicator but not something you want to make a investment decision on.
I will think about it and write a post.
Best Wishes,
Hi TIPGuy,
Another question. For relative PE graph, where did you get the data for years 1989 to 99 to get average PE as on 1st Jan 99?
Thank you,
Sacihn
Hello Sachin,
Damm you
too much curiosity you have 
On a serious note… that’s a drawback of this method. But the way I look at this drawback is think about what are the implications. As an investor, does it matter to me, if yes, how does it affect my decision?
I am interested in making a decision today and its implication moving forward. I looked at one year moving average (for short term impact), three year moving average(intermediate term), and five year moving average (long term or changing macroeconomic conditions, such as high PE becoming a norm).
I determined, it is better to fix the “average PE” based on past 10 years, and then calculate the relative PE to understand the trends. The average PE for last 10 years is about 17.
The chart I am showing, in essence, is back testing. Past is past, it will not allow me, or I cannot use it to make future investment decision. But average based on past gives a starting point, it gives me an anchor, which in this case is 17. This PE of 17 is historical average, and I measure where is current PE relative to this 17.
Now, PE of 17 is little bit higher than 12 (12 comes from graham school). That’s where the I decided to use %allocation. At PE of 12, I decide 100%.
Now, another argument could be why not just use PE of 12 and invest all at once. That is also OK.
I didn’t want to wait for PE of 12, who knows what markets will do. So I fixed 17 as historical anchor, and worked out a process for me. It keeps emotion out, it helps me invest as per valuation (to certain extent), and I keep buying periodically. In my case, buying quarterly depending upon valuation.
Now you can see, I am not too worried about 1st Jan 99.
I hope this helps. Let me know if you have any further questions.
Best Wishes,
TIPGuy,
Thanks for your quick reply and giving due attention to my questions.
I liked your original idea and when I sat to draw a plan for myself these came up. I have been a regular MF SIP investor for past few years and enjoyed the returns so far. I believe above process can be even better for me than SIP because I had been buying at the highests levels in Jan 08. Don’t want to repeat it anyway. However until I get satisfactory answers to following my comfort level will not allow me to follow it seriously.
1) During a bad patch for earnings PE may look higher and we may decide against investing. Relative PB, DY might help in here but difficulty in using them is something similar to my next point. Pure SIP will take care of this scenario of it’s own.
2) How to decide the % against relative PE? For example, why not 100% when relative PE is 0.7? In your example of 12 PE against average 17 PE, it is actually 0.7 not 0.5. So ideally this number can be different for you and me or somebody else. I want to decide ‘right’ rule for myself.
3) I was trying to look at the graph to get an idea of what ‘rule’ should I use for myself. Thinking of drawing the similar graphs for PB, DY then noticed the problem of 89-99 data.
Please try to touch upon these aspects in your post on the topic, if you are planning one.
Thank you for the blog, I really enjoy every bit of it.
Cheers,
~Sachin
Hello Sachin,
Thanks for the good points. Let me ponder over it and I will write a post.
Thanks for your patience.
Best Wishes,
Hi TIP Guy,
I liked this approach and it is good. thank you for the post. I have a qn to you……
Bench Mark mutual funds have a VIP method, some what similar to the valuation method you described, in which investor specifies a range of amount and if the market goes down…. more money will be used to buy units and vice versa. It is a kind of SIP, but depends on valuation to decide on amount that will be used for each purchase. Just curious to know, why didn’t you use that option. Tanks
Hello Young,
Good question. (1) I do not invest in mutual funds. (2) I do not have time or resources to calculate value of index. There are 50 companies in the index to determine individually, and then figure out weight for each, and then calculate the index value.
I remain skeptical about MF calculating valuation which for some reason keeps changing with the market.
I use relative PE because, all I want to do is buy the index, when index is historically cheaper.
Best Wishes,
eligible for 2 points
I came across this thought. can we try using STD Deviation, as an approach? 0.5, 1.0, 1.5 SD from mean for investing and profit-booking.
Also, investing every quarter, would be done after results declaration or before that..I think that can influence nos too.
Regards
Yogesh Tiwari
PS: I have started putting some money aside.
Hello Yogesh,
Std Deviation is an indicator for volatility. How can that we used for investing?
investing and profit-booking? you mean trading and profit-booking.
NIFTY has 50 companies, how would you track results declaration of all 50? or are you planning to track the top few? The results declaration of bottom 5 would not affect NIFTY unless you are planning to trade?
To reiterate, in this post, the objective was to invest based on historical lows. Meaning, when the index goes down relative to history, you buy the index. NOT trade in and trade out.
Probably, you are thinking of trading strategy
Best Wishes,
eligible for 2 points
Hi,
Here’s my context to what I meant, using SD approach.
I calculated average of PE values of Nifty of past 10yrs.(~17.18)
Then, for the same tenure of 10yrs, I calculated SD, which came around 3.6.
Hence, here goes the final approach.
Buy 30% of your cash, when PE deviates from mean by 0.5 SD (e.g. when PE is 17.18-1.8=15.38)
Buy 60% of your cash, when PE deviates from mean by 1 SD(e.g. when PE is 17.18-3.6=13.58)
Buy 100% of your cash, when PE deviates from mean by 1.5 SD(e.g. when PE is 17.18-5.4=11.78)
Since, mean and SD varies with time, using 10yr data would give a appropriate values.
With results, I meant PE of NIFTY would reflect accurate values once quarterly results are declared(Most of the companies declare quarterly results in 1st month of next quarter).
Now, profit-booking, my perspective is when we know market is near its high (PE High), we should ideally book profit too, in similar fashion as we invested.
Sell 30%, when PE is 0.5 SD above mean of PE of last 10yrs.
Sell 60% of what’s left, when PE is 1.0 SD above mean of PE of last 10 yrs.
Sell 100%, when PE is 1.5 SD above mean of PE of last 10yrs.
Now, since we are focussed on dividend too as a part of investment. We ‘d still reap dividends as the roller-coaster that happened in 2 last year(6.5k-2.5K-now back to 5.2k), normally doesnt happen too fast(it takes a few years, hence we ll get some dividend too.)
Reasoning: Why I want to choose this in-out strategy, is bcoz though we can assume that market will rise to new highs in next 10yrs, but god forbid, if we witness a situation like what happened in dow (it has been in 14k-6k range for almost 15yrs now, we ll end up now-where in terms of net asset.)
With this approach, we encash whenever valuation are too high. and buy again when valuation are low, whereby keeping our motive of wealth creation intact.
============================
I see that you are in market for quite long, I am just 2yr old. Please correct me/approach. Your inputs put my understanding to test.
Regards
Yogesh Tiwari
Yogesh,
I will get back to you shortly. Very long, I need to read it. Thanks for your patience.
Best Wishes,
I know you are pre-occupied. Still, I request you to please please comment on my reply.
Regards
Yogesh Tiwari
Yogesh,
I guess, I missed reading it…… I will do it, and get back to you shortly.
Best Wishes
Yogesh,
The approach you mentioned, in essence, is a trading approach (does not look like investment).
The focus is on trying to make profit based on volatility.
I would like you to perform a very simple regression analysis by varying price (and earnings) one at a time. See how the changes in earnings (w/ price constant), affect on your standard deviation, and vice-a-versa.
even if markets are flat (or range bound), the fluctuations in E will change your PE ratio. in that scenario you may not likely make any money….. you can understand this by regression analysis.
Please note: I am only sharing my thoughts. Before coming up with a trading strategy, you should fully understand how individual variables affect your outcome. You have two variables P/E. then you use second derived variable SD to make decision. So understand the relationship and see how it affects your results.
Best Wishes,
Hi TIP Guy,
Am new to investing and currently just studying various methods/approaches. Trying to study and learn (in a student like approach) from all your posts
. This post made a lot of sense to me because i am considering putting a portion of my investments into ETF’s for retirement days which is theoretically say 20 years away. Recently i stopped contributing (after 2 month’s of contribution) to my employer’s Super Annuation scheme (managed by ICICI) and plan to put that part of money in ETF. Basically i don’t want to over-expose that part of my money to my future experiments in the stock market.
I have a question though: What’s the rationale behind not having an exit or if i can better word it by calling it as a switch strategy of pulling out a certain %tage of money from the ETF into cash when the relative PE goes beyond a certain point ? Something very opposite in action but similar in nature to your investment strategy.
In the above graph, there are roughly 25 quarters where the relative PE is above 1, 8 qrts between 0.8 to 1.0 and 7 qrts below 0.8. At the same time there are around 15 qrtrs where the relative PE is above 1.2 and 4 qrts where it’s above 1.4 – 1.6(historical highs).
So, my question is will it be wrong to devise a strategy of converting a certain %tage of money say 10% of total portfolio from ETF to cash when the relative PE is above 1.2 and 20% of the portfoio when it crosses 1.4 .
Simly put my doubt is, if it’s not right to keep investing when the valuations are too high, won’t it make sense to liquidate a portion of the portfolio for the same reason.
I very much like the fact that your process eliminates around 60% of the transaction cost by holding to cash in the relative PE zone of above 1 (25 out of 40) and surely understand my suggested approach will increase the transaction cost along with the additional burder. But are they the only reason for you not considering it ?
Regards
Raja
Hello Raja,
On exit strategy….
(1) I am still in my portfolio building phase wherein I am focusing on accumulation and growth. I have decided not to follow the path of churning because it is very inefficient way for growing wealth. It lacks sustainability and consistency. It requires significant effort and time, which I do not have. Instead, I have decided to follow the path of letting investments grow at 12% to 18% on sustained and consistent basis. As long as I can get that, I will stick to it. Buying at lower valuations gives me that. My allocation to index is not a point where if it crashes today, I will lose lots of wealth. That’s why I said, in next few years, I will keep monitoring, and may be, after 10 years or so, when it has sizable allocation, I will figure out a exit strategy. I like to start by walking, then transition to running, and then decide when to stop. Starting/Stopping/Speeding/Slowing is going to wear me and my investments out.
(2) As the earnings or India incorporated grows, so will average index value. Average index values will keep inching upwards over time. P cannot remain constant as long as E keeps increasing over time. If today, index value of 15000 is considered normal because its PE12, then over time it will be normal to be at 20000 because PE is still 12. Check out the data set for last two decades, and you will realize the average value of index keeps inching upwards with growing economy. The likelihood of sustaining this growth is much higher than churning. This observation remains valid for Indian economy, but not for developed markets like US/UK/Japan.
Message is… it fits into my risk profile. it has high probability to meet my objectives. Therefore, for now, I will keep buying at low valuations and hold off exit until few years. Hope this helps!
Best Wishes,
Can’t thank you enough for taking out time and giving such a wonderful and detailed reply. Am a novice and still learning in bits and pieces. Am sure with time and effort it will all start fitting together and i’ll be able to get a grip on the subject
On a side note, i write about organic kitchen gardening on my blog. If that would be of interest to you, do visit my blog.
Thanks Again
Regards
Raja
Hello Raja,
Questions are always welcome. They were inquisitive. I have visited your blog. I like the subject of gardening, I love it. I can say that if you are the one who nurtures your garden (and not anybody else in the family) then you have what it takes to succeed in long term investing.
Best Wishes,
Hi TIP Guy,
Thanks for the compliment
Gradening is actually a hobby for me and am the sole gardener in my home 
Regards
Raja