The Price to Earnings ratio or P/E ratio of an index is an indication of how high or low the market valuation of the benchmark index is. Higher the P/E, higher the valuation, and vice versa.

The P/E ratio is a great proxy for the amount of risk associated with a stock or an index. A higher P/E ratio means that the index is anticipating higher growth in the future, and people as a result, are taking higher risk.

We have described a strategy below that allows you to invest based on P/E. This is a monthly calculator, that at the beginning of every month, helps you divide your investments between debt (Fixed Deposit and Mutual Fund instruments) and Equity (ETF instruments) to maximize your returns.

This strategy guarantees a return that is on average, 2X of returns from the Nifty index (see full historical data table for detailed calculations).

1. Decide on your investment's Debt (money in Fixed Deposit, Mutual funds) to Equity (money in ETFs) ratio based on the current P/E.
   A higher P/E means that you should move your investments to Debt instruments to reduce your risk, since market valuation is growing.
   As the index moves away from higher P/Es, the strategy migrates your investments from debt to equity, since now you face lower risk.
2. The Gains section at the bottom tells you how much returns you can expect based on historical data. Typically, the gains through this strategy are 2X times what you would see if you invest in the classic buy and hold strategy in the index. Backtesting is the key.