Hi Lotmanythings,
To your first question, "What is the maximum downside of loss by investing in mutual funds. Does it correspond to 14PE level or lesser?", the max. downside risk is that your entire investment may be wiped out if there is a huge correction or prolonged bear phase and you had entered the fund in a bull phase earlier. However, I am not sure if the max. downside can be quantified through a mathematical formula and hence, I will pass on the 14 P/E level query.
To your next question, "How do I decide my debt to equity ratio.", the answer lies in your current age profile, your risk appetite, your objectives or goals in life and lifestyle situation. As a cardinal rule, you should have atleast 4-6 months of your expenditure into a FD linked to a SB account or Liquid fund.
If you are 20+ earning a good sum with no liabilities/dependents, you can consider equity investments upto 90% of your portfolio with 10% spread over debt and gold. However, if you are married with kids and/or have parents as dependents, you may want to increase your debt exposure. If you are scouting for answers for yourself, it would help if you can provide more details about your fiscal present and proposed future.
Happy Investing !!