These ratios can help you choose the right mutual fund scheme

• Follow

With new fund offers (NFO’s) launching every now and then, the investors have been bombarded with too many choices to select from the pool of mutual fund schemes. Even after selecting a particular scheme to invest in, it gets even harder to understand whether the selected scheme will perform or not.

It is not an unknown fact that even the seasoned mutual fund schemes have seen their performance dwindling after few years. Having said that, although various factors like goal & objectives, time horizon, and risk appetite come into play while selecting a fund, there are few key ratios that can help you to make a more prudent decision while choosing a mutual fund scheme.

Let’s take a look which are these ratios that you need to analyse

Standard Deviation

It measures the level of volatility of a mutual fund. It also indicates how much your fund’s return can deviate from the historical mean return of your scheme. A higher standard deviation infers greater volatility, whereas a lower standard deviation bodes well for the investors who have a low-risk appetite and has less volatility.

Market experts said if a fund has an average rate of return of 12% with a standard deviation of 4%, then your return would range from 8-16%.

Beta

Beta measures the fund’s volatility against a benchmark. A beta of 1 means that the price of the investment will move in lockstep with the market. A beta value of less than 1 indicates that the investment will be less volatile than the broader market. A beta greater than 1.0 suggests that the price of the investment will be more volatile than the market. For instance, if the beta of a fund portfolio is 1.2, it is theoretically 20% more volatile than the market.

Conservative investors seeking to protect capital should prioritise low beta securities and fund portfolios, whereas investors seeking larger returns should seek out high beta investments. Again, a lot depends on the investor’s risk profile while deciding whether to go for a high beta or a low beta.

Alpha

Investor seeks Alpha in order to generate extra returns over the benchmark. Simply said, Alpha is the excess return on your investment over and above the fund’s predicted performance. However, it is the fund manager’s responsibility to generate that excess on a risk-adjusted basis.

Sharpe Ratio

It indicates what return is earned at the level of risk taken by the fund. A higher Sharpe ratio for the investors means a higher risk-adjusted return. One important factor which differentiates Alpha from Sharpe ratio is that Alpha indicates excess returns on a risk-adjusted ratio, and considers benchmark as a measurement to gauge performance.

R-Squared

It measures the relationship between a portfolio and its benchmark, with values typically ranging between 0 and 100. According to industry experts, a mutual fund with an R-squared value of between 70 and 100 has a strong track record of outperformance and is highly connected with the index. However, a fund rated 40-70 falls under average portfolio return, and a fund rated less than 40 often suggests that the portfolio’s returns are not performing like the index.