What is the P/E range that one should consider while investing a lump sum in a value fund or an index fund? What other parameters can be used in the case of an index fund?
- Jomy Joseph
At Value Research, when we analyse index funds, the only things that we are focused on are the tracking error and the cost since these funds are not supposed to do better or worse than an index. Thus, the funds with lower tracking error and cost are the ones that tend to be more favourable.
Coming to the P/E ratio of any fund, P/E ratio means price over earnings. I don't think investing based on P/E ratio is that simple. A low P/E is attractive, and a high P/E could mean that the stock is expensive. But if a company with high P/E can grow the earnings, that same price-to-earnings ratio will look lower. There could be great companies that command a high P/E but do well despite being expensive, justifying the high P/E. So a high P/E is justified if the company is able to grow its earnings. Thus, P/E in isolation is not necessarily a good barometer for deciding if something is cheap or expensive.