A clear pattern has come to notice in the past few years which shows that whenever the Sensex PE ratio has reached higher levels, there is a tendency to redeem the investments.
Specifically, whenever the PE ratio has gone past the 21 mark, meaning when markets have traded at extremely higher levels, equity funds have seen massive outflows. For instance, in September 2010, when the PE ratio was at 23.80 (highest in the past three years), funds saw their biggest outflow (in recent times) of Rs 7,011 crore. Overall, whenever the PE ratio has remained at higher levels (above 21), the industry has seen total outflows of more than Rs 23,970 crore in the past three years.
On the contrary, whenever the PE ratio has hovered at lower levels, the inflow into equity funds has been on a paltry scale; as in, less people have entered the market or have completely stayed away. Like in May 2012, investors pumped in just Rs 506 crore in fresh investments when the PE ratio touched its lowest level of 15.91 and the key benchmark indices lost over 6 per cent in that month also. The only exception to this was the month of July in 2009 when Sensex went up by more than 8 per cent and PE ratio was at 20.35. Investors hoping of another rally at that time had invested around Rs 4,000 crore in that one month only.
It clearly shows that investors have somewhat timed the markets in the past few years. But this frequent entry and exit goes against the principle of long term wealth creation.