Strategy to Outperform the Benchmark

A simple strategy to outperform the benchmark →

Hey there!

Last week was no less than a bloodbath for Indian markets. Nifty50 fell for 3 continuous sessions - a 3.51% drop in just 3 days. Although slowly inching back up, valuations remain below their peak.

Such falling markets create fear for most people, but are an opportunity if you know how to capitalize on it. So here’s a strategy for precisely that:

A Strategy to Outperform the Benchmark

➡️ One way to outperform the benchmark is to invest when valuations are below average.

➡️ In our strategy, we do an SIP only when the index PE ratio falls below its 5-year average, not every month. To test the effectiveness of this strategy, we ran a simple backtest for the time of July 2017 to July 2023, doing an SIP only when the index PE was <24 (based on the previous 5 years’ average), +1 standard deviation.

➡️ For every month where a SIP is skipped due to above-average valuations, the amount is added to the next investable SIP.

➡️ Looking at the results of this study, one could have made ₹1,61,670 more (15.51%) by following the PE-based SIP method instead of the regular SIP method. Though this strategy suggested going for months without investing, the returns generated by investing in the low-PE times produced outperforming returns.

💡 Evaluate stock market valuations for better investing decisions

Learn how to use valuation metrics, ride market cycles, and understand the effect of macroeconomic parameters on the stock markets in our Stock Markets Valuation Course by Mr. Kunal Shah.

Use NL30 at checkout for a 30% off ⬇️

⏳ The Time is Ripe

The Nifty PE currently stands at 20.84, which is way below its 5-year average of 26.17. The chart below captures the same ↓

Note that values of Nifty50 (green) & its PE ratio (pink) are as of 27th Oct 2023.

None of the above stock ideas are intended as recommendations. Please consult a registered advisor before buying/selling.

✍🏼 If you have any questions or just want to say hi, feel free to write to us at [email protected]

Join the conversation

or to participate.