Should Market Valuation Define Your Investments?

To understand the impact of future returns of investment made when the valuation of the market is high, our analysts studied the returns provided by UTI Index fund during different periods. The conclusion is interesting – especially if you are undecided about whether to invest through SIP or in lump sum

The Indian equity market touched an all-time high of 18,350 on October 14, up by 30 per cent from the start of the year and 56 per cent in the last one year. The market has remained one of the best performing equity markets globally year till date. The factors that are making the market move higher and higher are sequential recovery of key high-frequency indicators such as Services PMI, GST collection and Google Mobility

Data, which are all trending higher on a month-on-month basis. The market trading at all time has also resulted in an increase in volatility represented by India VIX, which has increased recently.

Higher Valuation

Besides volatility, the valuation of the market also looks stretched on different valuation matrices. For example, the valuation matrix used by Warren Buffet to gauge the overall valuation of the market is total market cap (TMC) relative to the GDP of the country. This gives a good estimation of the forward returns by the equity market. Currently, the TMC to GDP ratio for India stands at 131 per cent compared to the long term average of 71 per cent. The last time we saw such higher valuation was at the end 2007 and start of 2008 following which we witnessed subdued returns for the next one year.