I have been thinking about a strategy of allocation between Nifty Index Fund and an Ultra Short-Term Debt Fund based on how expensive Equity Markets are.
i.e., if Nifty PE is cheap then push more into the Nifty fund and vice versa.
I am very sure this is not a breakthrough strategy, many would have had similar ideas before.
I wanted to know your thoughts two aspects:
1. What do you think of this strategy overall in general?
2. What do you suggest the spread of allocation to equity based on respective PE?
That’s a good strategy. The p/e ratio helps to understand whether the markets are cheap or expensive. The cheaper - you invest more.
There are a few mutual funds doing the above, called p/e funds, check this pe
When individual wants to do a similar asset allocation, it’s possible to do the same as stated by you.
Buy more index funds when p/e is low and vice-versa.
The allocation depends on your risk profile, age etc… Usually it is 50/50 and if you are young 70/30 - 70% index funds and 30% liquid funds.
There is nothing new under the sun when it comes to investing. This is a popular way of analysing markets (popular ≠ sensible). Here’s a historical PE chart of Nifty vs Nifty.
Now assuming that you define overvalued as >20, and if you would stay out of the markets and stay invested in debt or cash, can yous stomach not being invested in equities?
There is a great quote by Keynes
The market can remain irrational longer than you can remain solvent
Now assuming that the market hits a PE of >20 and remains there for 5+ years, which is possible are you willing to stay out of the markets and lose out on returns?
Alternatively, if you do a debt & equity tactical allocation and move to debt and reduce equity when the market is overvalued, the same question arises.
This is a popular way of analysing markets (popular ≠ sensible). Here’s a historical PE chart of Nifty vs Nifty.