When we talk of investments we are obviously referring to long term investing. There are different ways to look at the payback. For example if the P/E ratio is 20 that means your earnings yield is 5% and therefore it will take 20 years to recover your investment purely measured by the earnings of the company. However, you invest for growth and for price appreciation. A more relevant measure will be the payback calculated by the average returns over the last 5 years. Let us understand this concept with the help of the index. The Nifty has given a return of around 12% annualized in the last 20 years. That means it takes an average of 8.5 years for you to recover your capital and that is your payback period. For the sake of simplicity let us ignore the time value of money. You can also consider the P/E ratio of the Nifty at 20 as the payback period, but that ignores the actual market returns.

Ria Jainanswered.When we talk of investments we are obviously referring to long term investing. There are different ways to look at the payback. For example if the P/E ratio is 20 that means your earnings yield is 5% and therefore it will take 20 years to recover your investment purely measured by the earnings of the company. However, you invest for growth and for price appreciation. A more relevant measure will be the payback calculated by the average returns over the last 5 years. Let us understand this concept with the help of the index. The Nifty has given a return of around 12% annualized in the last 20 years. That means it takes an average of 8.5 years for you to recover your capital and that is your payback period. For the sake of simplicity let us ignore the time value of money. You can also consider the P/E ratio of the Nifty at 20 as the payback period, but that ignores the actual market returns.