Mumbai: Investment firm Aequitas has flagged growing concerns around stretched equity valuations in India. The asset manager, run by Siddhartha Bhaiya, pointed out that the earnings yield - often used by institutional investors to measure equities' risk-reward versus bonds - on the Nifty has fallen below the post-tax return on 10-year government securities.

"Today, from a 10-year perspective, at current yields, equities are yielding lower than fixed income," said Aequitas in a note. "With key indicators flashing red - slowing earnings, softening demand, and promoter exits - the risks of capital erosion have grown significantly."

Earnings yield is the inverse of the price-to-earnings (P/E) ratio - a popular measure to evaluate valuations of an index or stock. Earnings Yield shows whether equities are compensating investors for the higher risk they carry.

With Nifty's P/E ratio of 22 times, the implied yield stands at 4.5%, while 10-year G-Secs are yielding 7.1% pre-tax, translating to roughly 4.7% post-tax.

"Low apparent bond yields coupled with a skewed taxation structure has meant there has been an incessant flow of money into the equity markets," said Aequitas. "On the surface, the narrative is one of growth, optimism and rising participation. But beneath that lies a concerning divergence - between valuations and fundamentals, between inflows and earnings, between optimism and reality."

Aequitas said it does not subscribe to the "Greater Fool Theory, where one buys at a high P/E only with the hope of selling at an even higher P/E."

"It's time for investors to ask: are they settling for less, when better risk-reward opportunities may be within reach?"