Mutual fund unlocked: What is P/E and P/B of the mutual fund?

Many investors while investing in the stock markets use various parameters before selecting a stock for the investment. Among all these parameters, the valuation is one of the key aspects for investors. In the case of mutual funds also investors should look into all the valuations keenly to understand the current situation of the mutual fund.

Price to earnings ratio is the key reference point for an investor to take an informed investment decision. In mutual funds, the P/E is calculated by taking a weighted average of the P/E of the all stocks which make up the portfolio of the fund. The higher P/E of the fund indicates that scheme mostly holds the stocks with the premium valuations which further indicates the approach of the fund manager towards growth oriented companies.

On the other hand, if the P/E of the funds seems to be lower then the fund is holding the securities which are undervalued in their particular sector. This implies a value-based approach where the fund manager is looking for the stocks which are undervalued by the market.

In the similar context, P/B is another important ratio which is considered in the valuation aspects of the fund. P/B is used to compare the market value of the stock to its book value. Fund’s P/B is calculated as similar to P/E, it is the weighted average of the P/B of all the stocks in the portfolio.

Both P/E and P/B can be a good guide for the informed decision but one should always remember that these are not the indicators of the future performance. For evaluation, one can consider standard P/E or P/B as the category average or the benchmarks ratios to compare fund at an individual level.