Are market highs good to invest in Equity mutual funds?

Short Answer

Understanding the relative position of the market, the absolute values do not matter much. What matters is what is the earnings multiple, currently the market is trading at, popularly captured by a metric called P/E ( Price to earnings).

Detailed Answer

As you watch TV or read any business newspapers, you will know about highs in the markets at different points of time. The market keeps on scaling and the party seems to never end. Sometimes you see highs and sometime lows in the market.

So, if you are thinking of entering the investing market and joining the party how do you go about it. Are you worried party may end soon and you will be stuck with a costly investment?

Let's look at some important points. Build a basic model to see if we can understand the impact of investing in very high markets or at the top of a bull run or just before the crash.

Investing in High Market

Here is the broad process that I normally follow:

  1. Defining what is high for market based on historical data.
  1. Using P/E data to create a market heat map over a long time horizon.
  1. Testing out how your investments performed in over heated market in past.
  1. Understanding the impact of Lump sun and SIP investments.

Investing in Equity Mutual funds: Overview

  1. Look for market P/E multiples to understand the state of market.
  1. Entering into mutual funds as markets are high can have a material impact to your investments.
  1. Impact is multiplied if you make one time lump sum investments at the top of market cycle.
  1. Depending on market conditions it can take upto 3 years to recover such one time investments.
  1. SIP can be an effective way to de-risk yourself from such investments.
  1. If you have lot of money to deploy you may use STP.

To understand how entering into equity mutual funds when markets are high , Let us try to define what does high market mean first.

While absolute value of Nifty or BSE is what you keep on hearing all the time on newspapers and TV. In terms of understanding the relative position of the market, the absolute values do not matter much. What matters is what is the earnings multiple, currently the market is trading at, popularly captured by a metric called P/E or Price to earnings.

SIPs help de-risk my investments and provides superior returns while entering at market highs.

This is my personal opinion only. This is not any professional advice. You can share your investing ideas as well.

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Categories: Mutual Funds
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