When To Invest In Mutual Funds

Retail behaviour is a very contrarian reliable indicator of market movements. There is never any meaningful retail participation in low P/E markets. Rather retail has invested large amounts in high P/E markets. For instance,in 1992, after the markets had moved up 10 times in the previous four years and P/Es were at a record 45 times, a single scheme collected nearly  4,500 crores (20,000 crores at today’s prices). In 1999, IT funds and IT stocks attracted very large sums of money at three-digit P/E multiples. In 2003, at record low P/Es of less than 10 times, the net flows in all equity funds in the country were around 100 crores in one year. In 2008, at high P/E multiples again of 20-25x, inflows in equity funds were 50,000 crore in a year. Since April last year till date, nearly 20,000 crores have been withdrawn from equity funds at P/Es of nearly 14 times.

Equities are a great compounding vehicle (Sensex is roughly doubling every 5-6 years in line with nominal GDP growth rates since inception in 1979) and investors should simply practice low P/E investing. Past data suggests that investments in equity mutual funds made in low P/E markets (say a P/E below 15) have done well over 3-5 years; on the other hand in high P/E markets (say a P/E of more than 20), investors should be cautious.