If you're wondering whether you've missed the equities bus, you haven't. The Sensex hit a new high on Monday to close at 7925 and as it gets closer to 8000, you're probably becoming more inclined to stay away from the market altogether, or pull out whatever little you put in. That may not be the best thing to do.

True, the market has run up sharply over a short period and appears overheated as valuations enter new zones. But a look at historic price-earnings (P/E) multiples shows that the current Sensex valuation of 15 times estimated FY06 earnings is still below the 15-year average of 18.

Besides, those valuations were reached when interest rates were at twice today's levels and India's competitive advantages in sectors such as technology or even component manufacturing were undiscovered.

Moreover, the corporate sector was much more leveraged, capacities were not of global scale and there was no consumption boom.

Valuations for a whole host of stocks are no longer compelling. In several instances, the multiple is far higher than the projected earnings growth for the next couple of years. Prices have run ahead perhaps because stocks are illiquid and there are investors who are convinced about the companies potential and are willing to hold on for three or four years.

The corporate sector's earnings have been growing at 25-30 per cent in the last two years and while that may not be sustainable, given that costs are going up and competitive pressures are severe, the growth in the next few years, assuming a GDP growth of between 6 per cent and 6.5 percent, should be around 15-16 per cent.

Compare that with growth rates for peer countries in the region --South Korea could well post negative growth and its P/E is around 11 times. The earnings growth for Taiwan is estimated to be less than 5 per cent.

The Indian market is perhaps the most highly valued but that's because growth here, it is believed, will be more sustainable.

Besides, the Indian economy is relatively less dependent on exports and more diversified. Sure, earnings for individual companies could get derailed in a particular quarter, but that would not be reason enough to abandon it.

Over the past year diversified growth schemes have given a category return of around 64 per cent versus 52 per cent for the Sensex, with some schemes giving nearly 100 per cent. Mid-cap schemes have done even better --the category average is 74 per cent. It would be optimistic to expect such performances annually in the future--returns could be far lower.

Sector funds too have delivered spectacular returns--the category average for FMCG schemes has been 84 per cent while for IT it has been 52 per cent. Looking ahead, the ideal way to play the market is perhaps not through sector schemes but through diversified schemes which would be in a better position to capture the growth across sectors.

Interestingly, index schemes saw returns of 52 per cent funds (BSE Sensex ) and 48 per cent (NSE Nifty). Once again, it would be difficult for these schemes to give such repeat performances every year.