Is Nifty Index Expensive?

Media focuses way too much on the movement of Nifty 50 index. In the recent past Nifty 50 has been mounting up without the support of fundamentals. Is it a true barometer for the Indian economy?

Is Nifty 50 expensive?

Let’s try and understand what is happening in Nifty 50.

The Nifty 50 is a flagship benchmark index on the National Stock Exchange of India Ltd (NSE), which comprises of the top 50 companies in terms of free-float market capitalization (essentially the count of shares in active circulation in the market at any given point of time). It is a well-diversified index, with companies from 13 sectors such as financial services, energy, IT, automobile, metals, media and entertainment etc.

Source: www1.nseindia.com

Evaluating and analyzing the Nifty 50 can give reasonably reliable results on whether the overall economy is doing good or not.

But does only viewing the numbers of Nifty go up and down tell us all that we need to know?

As is the case with most things related to analysis, it doesn’t. The numbers can even be misleading. Any economist will tell you that if only the extremes are pulling the numbers up and the majority of companies are in bad shape, then the numbers are going up only technically and the true overview is much different.

Therefore, we need to analyze the index on other factors as well. The question, is Nifty expensive, can be answered by looking at the price to equity ratio.

What is Price to Earnings (P/E) ratio?

Price to Earnings ratio is the current market price per share divided by the earnings per share. In terms of the Nifty index, the PE ratio indicates its overall expensiveness or cheapness with regards to its earnings.

Through these factors, we can learn if the markets are historically cheap or expensive and make certain investment decisions.

Given below is the quarterly PE ratio of Nifty over two decades, from 1999. The overall average PE ratio over this time is around 20.

As we can see from the above tables, the PE ratio in the previous 5 years (2015-19) has been above 20, with the PE reaching an all-time high of 29.07 times in 2019’s second quarter. It has been above 25 from 2017’s Q2 all through 2018 and 2019.

The high numbers in the PE ratio indicate that overall, the markets have been priced at 25-29 times their earnings and that Nifty is indeed valued dearly.

Nifty is currently one of the most expensively valued global equity indices among its emerging market peers. The MSCI Emerging Market index’s P/E is at 15.02 times. The MSCI shows large and mid-cap stocks from among 26 emerging countries.

Media often quotes that huge money is being invested by foreign investors (FIIs) in India. That money is often invested only in Nifty 50 companies, making Nifty 50's PE even more expensive.

Most of the emerging economies are struggling to grow their GDP's. India's growth has also slowed but still it is the second fastest growing economy in the world. Due to this, FIIs have been pouring money in India.

This is responsible for making Nifty 50 quite expensive and the high value may not be correlated with the underlying growth in the Indian economy.

At this time, the large-cap category may be completely avoided or a basket of only high-quality stocks should be created. Quality stocks may be extremely expensive too making the return expectations more muted over short to medium-term horizon.

Disclaimers

• Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

• The securities quoted are for illustration only and are not recommendatory.

• Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

Details of the advisor

• Advisor: Ankur Kapur

• SEBI RIA No.: INA100001406

• BASL Member ID: BASL1337

Real Estate - is it a good time to Invest?

Real estate is a favorite asset class for a lot of investors in India. However, is it a good time to invest in a real estate?

Real estate investment

In the current market, most of the real estate transactions are being completed by the end-user. Real estate prices escalate when ‘investors’ (and not the end-user) are in the market creating artificial supply constraint and putting upward pressure on the real estate prices.

Let’s understand why real estate has always been a ‘hot asset class’.

Legacy issues

The previous generation in India has created wealth primarily by investing in hard assets such as real estate and gold. The same generation recommends buying a house for the new generation.

As the income increases, often people tend to buy a home. The thought process is that if the funds are allocated in real estate, they have taken appropriate action of allocating cash in an asset. Since real estate investment requires a lot of funds, only a down payment is made and the rest is in the form of home loan.

Often people associate buying a home as asset creation but in reality, it may be just a liability. Over the last decade, real estate prices have not increased by 10% per year. However, the cost of home loan has been between 8.5-10% per annum.

Tax benefit

An additional reason why people invest in a real estate is the tax benefit.

Investment in real estate could give you tax benefits, such as Sec 80C of the Income Tax Act, provides a deduction for principal repayment on housing loan during the year to the extent of ₹1,50,000. Additionally, the interest component of the loan gets a deduction of ₹2,00,000.

If the amount of loan is less than Rs 25 lakhs, you may reap the full benefit, beyond that it will be only ‘cost’.

Diversification

Investment in real estate can diversify an investor’s portfolio other than holding stocks and bonds. Although real estate comes with a serious liquidity constraint, investors may associate real estate investing safe but reality may be different.

Regular income

Rental income is one of the reasons that people invest in real estate. Often rents catch up with inflation and can provide inflation-adjusted income. Unlike, the west, in India, rental yields are low and are often in the range of 2.5%-3.5% per year. Taking a home loan at 9% p.a. for a rental yield of 3% p.a. with the hope of property price appreciation may not be a good idea.

An alternate to investing in a real estate is Real Estate Investment Trust.

Real Estate Investment Trust (REIT) is a trust where the aim is to channelize the funds that could be invested into owning a real estate property to create income for the investors.

REITs, provide an opportunity for investors to hold shares in the real estate sector and in return generate returns. A few years back REITs were launched in India. The expected return was indicated around 9% p.a. Given the pre-tax return of around 9% p.a., investors were left with asking for more. Popularity of REITs in India will still take sometime.

When is the right time to buy real estate?

Low-Interest rates – With consecutive cuts, RBI has brought the repo rate at 5.40%. Repo rate is the rate at which commercial banks borrow from RBI. The rate, at which banks lend to people, depends highly on Repo Rate. This rate is directly linked with how much you pay for a home loan. Lower the repo, lower is the mortgage rate.

Rental Yields – Rental yield is simply the annual rent on a property divided by the price of the property. As the rent increases and/or price of the property decreases, rental yield increases.

Let’s take an example of a property in Gurgaon. It’s a famous DLF project, Hamilton Court.

The cost of a flat in Hamilton Court is around Rs 2.8 crores and it has not changed since the last few years. In Jan 2018, the monthly rent was Rs 50,000 per month but in 2 years, the monthly rent has increased to Rs 65,000 (30% increase in rent).

The rental yield has increased from 2.14% to 2.80% in two years. Repo rate has reduced from ~8% to 5.4%.

The right time to invest in a real estate is when the difference between rental yield and the repo rate is minimal. We still have to wait before any investment in Hamilton Court maybe justified. Please note that this assessment has to be done at a project level.

Usually a real estate cycle is around 15 years. We saw mortgage/repo rate close to rental yields in 2005. Let's hope the revival in real estate starts from 2020.

Keep a watch on the rental yield of the property you want to buy and the repo rate.

Disclaimers

• Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

• The securities quoted are for illustration only and are not recommendatory.

• Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

Details of the advisor

• Advisor: Ankur Kapur

• SEBI RIA No.: INA100001406

• BASL Member ID: BASL1337

How to plan for your estate?

Estate planning is not a top priority for most of the people. Often those who plan the sensible distribution of wealth are seen as wise seniors and respected even after they are gone.

Estate Planning

We plan for our household and medical expenses, buying a house, plan for retirement, children's education etc. One area that gets the least focus is estate planning. Most people believe that the only option available for estate planning to them is ‘writing of Will'. Estate planning is not just writing of Will and getting it probated. We also need to know what is estate planning, why it is important to them and what are options available.

With our growing income, the lower middle class is now becoming an upper-middle-class, and upper-middle-class is becoming an upper class. People today realize the need to preserve the wealth built and pass it down judiciously. Thus, the need for estate planning is increasing.

What is estate planning?

We would like to pass down our hard-earned saving in a judicious manner to the next generation. Whatever we accumulate during our life (earning minus expense + growth) forms our estate that we pass on to our next generations. The estate includes immovable like home (real estate), agricultural land, etc, as well as immovable assets like gold jewellery (commodity), our bank balance & fixed deposits (cash).

Why plan

The objective of estate planning is that you decide who will receive and control your assets. If you desire that every penny of your hard money should go to your next generation, you should be doing estate planning.

When to plan

Most of us defer estate planning for a later date or time. Not that we do not want to plan the distribution of our assets, but we avoid for various reasons such as—to avoid discussion on demise, avoid difference of opinion with a better half on the distribution of asset, lack of knowledge etc. You can plan for assets acquired and also for assets that you may acquire in future. We must put this on our priority list and not postpone it, thinking it to be irrelevant.

Here are your options for estate planning:

1. Write a Will

Advantages

• It avoids family dispute (though not a sure method)

• Distribute assets according to your wish

Disadvantages

• Needs to be probated to avoid legal conflict. (Probate means a copy of the Will certified under the seal of a court of competent jurisdiction).

• Expensive process.

• Can be challenged in court.

• Only control assets that are in one's name.

• Not helpful when one becomes incapacitated.

• In case of a minor child, need to depend on the executor or court-appointed guardian.

2. Giving away / beneficiary transfer: Distribute the property (estate) when one is alive.

Advantages

• Avoid family disputes

Disadvantages

• In case the person is not earning, he/she would become dependent on children.

• Once distributed, it cannot be claimed back

3. Joint ownership

Advantages

• Least bothersome

Disadvantages

• Unintentional disinheritance

• Difficult to remove co-owner

4. Revocable trust: Create a living trust and transfer assets to trust. The grantor creates trust by writing trust deed and funds the trust by transferring the assets (movable as well as immovable). The trust deed specifies grantor's instruction for distribution of wealth. While grantor is alive, he has full control over the activities as well as an asset transferred.

Trust can be created by the writing of the trust deed. This requires a person to specify the purpose of the deed and how will it function. He needs to identify the trustees and give the instruction of appointing successor trustees. He also needs to specify when trust has achieved it's objective and how (and when) trust can be dissolved and assets liquidated.

Trust needs to be registered with registrar office of state government (trust falls under state list and hence are governed by state laws) by paying stamp duty.

Advantages

• Control is in hand of the creator.

• Can change / revoke at any time?

• Instruction is carried out when one is incapacitated or dies.

• Saves the trouble of probation.

Disadvantages

• Costly

There are a few options, but working with an estate planner, often a lawyer is prudent. A lawyer can understand your requirement in detail and suggest a suitable option.

Disclaimers

• Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

• The securities quoted are for illustration only and are not recommendatory.

• Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

Details of the advisor

• Advisor: Ankur Kapur

• SEBI RIA No.: INA100001406

• BASL Member ID: BASL1337