New Delhi, June 17 -- Two mutual funds may belong to the same category and have similar long-term returns, yet their portfolios can look very different in terms of valuation. One way to gauge this difference is through the price-to-earnings (P/E) ratio.

The metric provides a view of how the market is valuing the companies held by a fund at a given point in time. While it is not a measure of future performance, it can help investors put a fund's portfolio into context and compare it with peers.

Let us understand it in detail.

Unlike a company, a mutual fund does not generate earnings of its own. Its P/E ratio is therefore derived from the earnings of the companies it holds in its portfolio. The metric is calculated as the weighted avera...