PRINCIPAL SMART EQUITY FUND- THE P/E BASED FUND

WHAT IS P/E:

P/E or Price to Earning Ratio (P/E Ratio) is a time tested measure to assess market valuations. Simply speaking, it is the price the market is willing to pay for a company’s earnings. It is calculated as Stock Price (divided by) Earning per Share (expressed as number of * times of earnings). A high P/E may indicate an expensive stock relative to its peers. However, it can also indicate that the market has high hopes for this stock’s future and has bid up the price. There is no ‘right P/E’. It is a subjective question. 

WHY INVEST IN P/E BASED FUNDS?:

The P/E Way - The P/E Ratio has traditionally been used as a tool to assess whether the equity markets are cheap or expensively priced. Investing the P/E way allows you to tactically manage your asset allocation  by moving your investment ‘strategically’ across equities and debt based on certain pre-set conditions and time periods set by the fund you have invested. These funds reduce the allocation to equities at higher PE levels, thus minimizing the downside risk. At lower PE levels, the allocation to equity is increased, thus capitalizing on their upside potential. Such deliberated asset moves help the fund contain downsides better than pure-play equity funds and provide an opportunity to deliver better returns than debt funds during protracted rallies.

Bull Market or Bear Market - This Strategy Works
Over a long term period, the P/E way has consistently performed well across different time periods and is more suitable for investors looking for consistent returns with limited downside risks.

The table below highlights the returns delivered through a P/E based strategy vs. market returns.

Time Period	BSE 100 Index	PE Based Strategy BSE100	Crisil Balanced Fund Index

	Returns	Value of Rs 1 Lac	Returns	Value of Rs 1 Lac	Returns	Value of Rs 1 Lac
1 Year	27.68%	Rs.127,682	16.07%	Rs.116,069	19.37%	Rs.119,368
2 Year	46.71%	Rs.214,776	44.36%	Rs.207,973	31.74%	Rs.173,297
3 Year	0.79%	Rs.102,394	12.52%	Rs.142,405	3.89%	Rs.112,130
5 Year	20.68%	Rs.255,793	25.06%	Rs.305,681	15.72%	Rs.207,386
7 Year	23.09%	Rs.428,093	29.15%	Rs.599,473	15.79%	Rs.278,976
10 Year	18.69%	Rs.555,035	25.29%	Rs.953,279	NA	NA
Since January1,1990	18.97%	Rs.781,069	25.71%	Rs.1,498,614	NA	NA

 

PRINCIPAL SMART EQUITY FUND:

Principal SMART Equity Fund, an open-ended equity scheme, is a P/E based fund which dynamically changes its asset allocation between equities and debt / money market instruments based on the weighted average price-earnings ratio (P/E ratio) of the S&P CNX Nifty Index (NSE Nifty).

The Scheme will decide on allocation of funds into equity assets based on equity market Price Earning Ratio (P/E Ratio) levels. When the markets become expensive in terms of a set ‘P/E Ratio’; the Scheme will reduce its allocation to equities and move assets into debt and/or money market instruments and vice versa. Such a strategy is expected to optimise the risk return proposition for the long term investor. Under normal circumstances; the scheme’s equity allocation may follow the following pattern based on S&P CNX Nifty P/E Ratio Level –

Weighted Average PE Ratio of S&P CNX Nifty	Equity Component (%)	Debt Component (%)
Upto 16	100	0
Above 16 – Upto 18	80 – 100	0 – 20
Above 18 – Upto 20	60 – 80	20 – 40
Above 20 – Upto 24	30 – 50	50 – 70
Above 24 – Upto 26	10 – 20	80 – 90
Above 26 – Upto 28	0 – 10	90 – 100
Above 28	0	100

Asset Allocation Pattern
Under normal circumstances, the asset allocation of the scheme shall be as under

Type of Instrument	% of Net Asset	Risk Profile
Equity & Equity Related Instruments of Large Cap Companies	0 % - 100 %	Medium to High
Debt or Money Market Securities and / or units of Money Market / Liquid Schemes of Principal Mutual Fund	0 % - 100 %	Low to Medium