What are the Key Metrics used to evaluate Mutual Funds?
Below are some key measures which can be helpful to assess / valuate the Mutual Funds. We have tried to explain it below.
What is Alpha in Mutual Funds?
The term Alpha is basically used to describe the excess return of the fund over and above the benchmark returns on a risk adjusted basis. So ideally alpha is the value that the portfolio manager will add or subtract from a fund portfolio’s return after adjusting for beta of the portfolio. An alpha value of 2 means that the fund has outperformed its benchmark index by 2%. The higher the alpha value the more beneficial it is for investors.
What is Beta in Mutual Funds?
The term beta of a mutual fund refers to the measure of relative risk of the fund with reference to its benchmark and is expressed as a number. It can be any value above or below 0. A beta of 1 implies that the investment’s price will move in lock-step with the market. On the other hand, a beta of less than one implies the investment will be lesser volatile than the market. If the value of beta is more than one, the investment’s price is more volatile than the market. A high beta value indicates higher volatility.
What is Sharpe Ratio in Mutual Funds?
The Sharpe ratio is used to measure performance that is risk adjusted. It can be calculated by subtracting the risk free rate of return from the rate of return for an investment and then dividing this result by the investment’s standard deviation of the returns. This ratio indicates to investors whether the returns are due to good decisions or just excess risk. The higher the Sharpe ratio, the better is the risk adjusted performance.
What is Standard Deviation in Mutual Funds?
Standard deviation measures the spread of the data from its average. It is applied to the rate of return of an investment in order to measure volatility or risk. The std dev of a mutual fund conveys to us how much the returns are deviating from the expected returns based on past performance. The higher the volatility, the higher the SD. For more on Standard Deviation please click here.
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