Amid all the debate about whether there is still steam left in the markets or not, one of the common arguments given by the India story fans is that the valuations are still well under control and the PE ratios are not over the roof yet. Indeed, the markets barometer Sensex confirms that. Since the start of this year, the index has scaled new heights but its PE multiple has been hovering around a comfortable zone of 16-17.
But the story changes a bit when we move on to the domain of mutual funds. The average PE ratio of diversified equity funds has been on the rise-from 18.95 at the end of January 2005 it has touched 24.19 by the end of November. Between this, there is a lot of diversity at the individual fund level. As on November 30, 2005, at one of the spectrum was Sahara Mid-Cap Fund with a PE ratio of only 14.15, while on the other stood Birla Sun Life Buy India Fund with a very high PE of over 39.
The PE ratio of a fund is derived from the underlying portfolio it is holding, and hence indicates the preferences of the fund vis-à-vis growth and value stocks. The fund investing a significant part of its assets in value-oriented stocks will have a lower PE ratio in comparison to other funds in the category which invest heavily in growth stocks. Upon looking at the Value Research Fund Style Box, you will find that most of the diversified equity funds currently have a growth-oriented portfolio. And this is not difficult to justify given the booming stock markets.
But this time for the fund scanner, we fished for funds that earned smart returns even while staying away from high momentum stocks having high PEs. We looked for funds whose average PE ratios for the 11 months of this year has remained at the lower levels in the category but still they have managed category average beating returns. Here are the five funds that emerged at the top of our screen.