All you want to know about P/E ratio funds

These funds base their investment strategy largely on P/E ratio of individual stocks or indices

P/E funds or Dynamic Funds are funds which rebalance their portfolios to take advantage of market movements. While some schemes base their investment strategy on some pre-determined P/E ratios of an index like Sensex or Nifty, others follow an asset allocation strategy based on various factors. 

For instance, FT India Dynamic PE Ratio Fund of Fund (FTDPEF) invests in Franklin India Bluechip Fund and Templeton India Income Fund. The fund increases its equity allocation up to 90%-100% when the P/E is up to 12 and simultaneously reduces the debt component and vice versa. These funds will invest when the P/E ratio is low and sell when P/E is high.

Tata MF’s Tata P/E Equity Fund invests 70% of its assets in companies whose P/E ratio is less than that of BSE Sensex. This fund also evaluates the company’s management competitiveness, business competitiveness, growth prospects and other fundamental parameters apart from filtering companies with low P/Es.  Principal MF’s Principal Smart Equity Fund launched in November 2010 follows a similar strategy.

ICICI Prudential Dynamic Plan adopts a defensive strategy when the market is overvalued and gets aggressive when markets are down.  One flipside of such funds is that these funds could miss the bus when the markets are on a sustained rally, feel experts.

However, experts caution that PE should not be the only criteria one should look at while investing. “These funds are good for retail investors who are not very well advised. Such funds increase equity exposure when the valuations are cheap and vice versa. The concept is decent. It puts discipline in your portfolio. This cannot be the only fund which one should hold. One has to diversify,” says Dhruva Raj Chatterji, Senior Research Analyst, Morningstar India.