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Are P/E and P/B ratios relevant when it comes to selecting a mutual fund scheme?

Dhirendra Kumar helps understand the utility of valuation ratios for investing in stocks and mutual funds

How relevant are P/E and P/B ratios for selecting stocks? Do they have the same relevance for selecting a mutual fund scheme?
- Rajesh Singh

For selecting a stock, Price-to-Earning (P/E) and Price-to-Book (P/B) ratios are relevant because they are critical and something at which everyone looks at as they are important valuation metrics. But it is just one of the many metrics. Because if you look at just a low P/E ratio in an industry which is not growing rapidly, then it may not be the right thing to do. So it is a relative metric in relation to the industry, to the market and the company's own past.

For example, there are many companies which were growing very fast in the past and were commanding a high P/E ratio. Over a period of time, their growth slowed down and they were no longer rapidly growing businesses as they matured. Thus they don't justify the high P/E ratio anymore. So it is a relative thing to consider based on various parameters.

In case of mutual funds, it could be relevant. You find these two variables for every equity fund on Value Research Online . It is a weighted average value of P/E and P/B ratio of all the stocks in the portfolio. It gives you a rough sense of whether a fund is value-oriented or a high-growth oriented, depending on its P/E and P/B ratio values. However, it is only a rough guide to the relative valuation and nothing more and it should not be a critical part for you to make a judgment based on this alone.

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