Time to stagger investments in Nifty 50 as index trends above its fair value

Mumbai: A sharp rise in the stock markets has led to wealth managers asking investors to stagger their investments into the broad-based Nifty 50 over the next one year as they believe it is trading above its fair value.

There is a 50% probability of making a negative return over the next one year for lump sum investments and hence staggering through systematic transfer plan (STP) in mutual funds will work better.

“The Nifty 50 is trading a little above fair valuation zone based on historical data. Hence investors are better off investing in the market through a 12-month systematic transfer plan,” said Vijai Mantri, chief investment strategist, JRL Money. Mantri looks at a combination of fundamental parameters like PE/PBV, dividend yield and past returns.

Since its lows of March 23, 2021, the Nifty PE has risen from 18.49 and now stands at 21.70. In the same period, its price to book value rose sharply from 2.34 to 4.9 and dividend yield fell from 2 to 1.45. During this period, the Nifty returned 125.8%

In the recent rally, since March 24, the Nifty 50 has risen by 10.45%, while over the last one year it has returned 14.50%.

A study by JRL Money found that if investors make a lump sum investment in the Nifty 50 now, over the next one year and three year periods , there is a 25% and 15% probability of making a negative return and just a 50% and 75% probability of earning 8% return. Analysts believe this does not make the risk reward favourable for making lump sum investments.Mantri cautions that one should not blindly follow this strategy as if markets rise and then fall then this strategy may not work and in such a scenario, investors should further stagger their STP. For instance, if markets rise by 15% then the strategy will recommend investing only half of the STP amount. If markets were to fall then monthly STP tranche can also double.STP is a strategy often used by investors to stagger their investments over a 6-12 month period, especially when markets are expensive or they are unsure about the direction. The lump sum money is first parked in a liquid/ultra short-term fund or arbitrage fund. From this fund, at a regular interval, which is typically monthly, a specific amount goes to a targeted equity-oriented fund. This staggers investments and investors also earn 6-8% on the money invested in liquid /ultra short term or arbitrage funds and if the market were to fall as expected, they would get a higher number of mutual fund units when the money was transferred to equity.

Time to Stagger Investments in Nifty 50 as Index Trends Above its Fair Value

STP also gives you a choice to accelerate or slow down your investments.

“Systematic transfer plans offer you great flexibility and are tax efficient. Based on the market conditions, you have a choice to accelerate or even reduce your flow into the equity mutual fund scheme,” said Nirav Karkera, head of research, Fisdom.

So if corporate results are good and an investor wants to accelerate his STP, instead of 12 months to six months, there is flexibility to do it. Also, if the money is parked in an arbitrage fund, since it is taxed as equity investments, redemptions before a year would be taxed at 15% compared to 30% in a debt fund for those in high tax bracket


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