BONDS VS. EQUITIES: WHAT THE YIELD RATIO TELLS YOU ABOUT MARKET VALUE

The yield comparison is a helpful tool—not a golden rule. Think of it as an additional filter

- JOYDEEP SEN

Beyond headline indices and P/E multiples, one under-the-radar tool can help investors assess when equities offer more bang for the buck than bonds—and vice versa. It's called the earnings yield-to-bond yield ratio, and it might just give you a smarter lens into market valuation.

Think of earnings yield as the return you'd get for every rupee you invest in equities. It's simply the inverse of the price-to-earnings (P/E) ratio. For example, say the Nifty50 index is at 25,000 and the combined earnings per share (EPS) of its constituent companies is 1,120. Dividing 25,000 by 1,120 gives a P/E ratio of 22.32. Inverting this gives an earnings yield of 4.48%. That means, based on trailing twelve-month (TTM) earnings, you're earning ₹1,120 on a ₹25,000 investment.

Note that this is based on TTM EPS. If you use projected earnings, the P/E would be lower and the earnings yield correspondingly higher, which can alter the attractiveness of equities.