Investing in a high-valuation market: What you need to know

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The Sensex, India's benchmark stock market index, reached a record high of more than 77,000 points on Monday, sparking ongoing concerns about market valuation. Investors are grappling with the question of whether it's the right time to invest or if they should wait for a correction.

Yes, the market valuation is expensive. The Nifty 50's price-to-earnings (PE) ratio stands at 21.9, slightly below its one-year average price-to-earning of 22.3. Nifty’s 12-month forward PE is at 20.76. The number of companies shown in the infographic can suggest how one has to be selective when investing in stocks or sector-specific mutual funds.

Valuation is a major concern, but should you be worried? What if the market corrects by 20 percent tomorrow? Should you avoid investing due to this fear, or worry about your existing investments? Before making a decision, consider asking the following questions:

Don't take the risk of not investing. Look at our country's growth potential—can you afford to be out of the market?

India's economy is poised for a significant surge, driven by a sizzling GDP growth rate of over seven percent in FY23 and projected to rise in FY24. With a projected GDP of over $2 trillion by 2030, India is set to become the third-largest economy in the world by 2027.

> India's GDP growth rate is expected to rise in FY24.

> The country's per capita income is projected to soar to $5,000 by 2030.

> Consumer confidence is high, with a 25 percent surge in travel bookings and a 38 percent increase in premium meal orders.

> Infrastructure spending and smart city investments are laying the foundation for a booming economy.

> The surge in retail investor engagement is evident in the Indian equity realm, with demat accounts increasing from Rs 4.1 crore in FY20 to more than Rs 13 crore in FY24.

> India's merchandise and services exports are expected to surge to over $2 trillion by 2030.

> The Make in India initiative is poised to elevate India's manufacturing value chain, with projections indicating a climb to $1 trillion by 2025.

> India's innovators are reshaping industries, with hi-tech sectors poised to triple by 2030.

> Investments in education ensure a skilled workforce ready to power this transformation.

> A $700 billion clean energy drive positions India as a leader in the sustainability race.

> $45 trillion economy India’s GDP is expected to grow from $3.4 trillion economy today to $45 trillion by 2052.

There is no generic answer for this question.

Investing is a complex matter. Whether to invest in a high-valuation market or wait for a low valuation depends on various factors, including your risk profile, asset allocation, and financial goals. Therefore, consider the following before deciding:

Before deciding, take a closer look at your financial situation. Are you investing a significant portion of your net worth in the market? Are you in your prime earning years or nearing retirement? Are your investments aligned with your financial goals and risk tolerance?

This becomes even more critical if you choose to invest directly in shares versus mutual funds. For mutual funds, if you plan to invest in sector-specific schemes, the market valuation becomes even more significant. Your risk profile, asset allocation, financial goals, and age should guide how much and when to invest.

You can't pick stocks indiscriminately. It’s important not fall in love you’re your stocks and adopt a 'set it and forget it' mentality. The stocks that gave consistent high returns in the past may not continue to do so in the future. To navigate the next market rally, you must be extremely smart and cautious, as wrong choices can be disastrous. For most, mutual funds are a safer bet unless you have the expertise to know what to buy. So, pick stocks carefully. Will the likes of HDFC rise again or will the last two years' heroes continue to shine? Only time will tell.

As investment guru Warren Buffett once said, "The stock market is designed to transfer money from the active to the patient."

Invest wisely and be cautious.

If your allocation to equity is currently low, don't wait too long. Gradually deploy funds via mutual funds unless you have the time, money, and expertise to select individual stocks. Remember, most investors have only been in the market for the last three to four years, experiencing a mostly upward trend, but it’s essential to be cautious.  

Invest wisely, consider all the above factors to make informed decisions and remember what great investment guru Benjamin Graham once said, "Successful investing is about managing risk, not avoiding it."