How to select best mutual fund, earn maximum
There are certain parameters like Alpha, Beta, Standard Deviation and Sharpe's Ratio. By comparing these ratios, one can easily analyse the return, volatility, risk and potential of a fund.
Mutual funds have emerged as one of the most popular options to multiply money. It has slowly gained a place in the portfolios of people as it involves less risk, study and efforts as compared to investing directly in stocks. There are a number of mutual fund options available these days. But, how will you pick the best mutual fund suitable for your appetite? Abhinav Angirish, Founder, Investment Online, told Zee Business TV, "There are certain parameters like Alpha, Beta, Standard Deviation and Sharpe's Ratio. By comparing these ratios, one can easily analyse the return, volatility, risk and potential of a fund."
One can easily understand and compare these tools to select the best available fund in the market.
Alpha is a performance parameter used to compare mutual fund returns with respect to the benchmark index of market. For example, ''If your fund has generated 13% annual returns, whereas benchmark index of the market has gained only 10% in a particular time; means that your fund has generated an alpha of 3%. However, in case the fund has performed bad or lesser than index (9%), it is referred to as a negative alpha, '' Angirish explained.
Beta is a performance parameter that measures the risk and volatility level of the fund. If a beta of your fund stands at one (01), it means that it has a similar volatility or risk ratio as compared to a benchmark index suitable to be compared with your fund.
''In case you are invested in a fund category of largecap shares, you would compare your fund beta with Nifty50 or Sensex. If beta of your mutual fund is less than or equal to 01, it has a good beta. However, anything over 01 is negative for your fund, and you might have been bearing more risk to earn given amount of returns, '' said Angirish.
3. Standard Deviation
Standard deviation is applied to the annual rate of return of an investment to measure its volatility (risk). A volatile stock or fund would have a high standard deviation. With mutual funds, the standard deviation tells us how much the return on a fund is deviating from the expected returns based on its historical performance.
4. Sharpe's Ratio
The Sharpe's ratio uses standard deviation to measure a mutual fund's risk-adjusted returns, as it tells you the worth of risk you bear. It tells you how well your mutual fund portfolio has performed in excess of the risk-free return (if you would have invested in government securities instead, which are almost risk-free). This gives you an idea if your returns are due to smart investment decisions or excessive risk. Higher the Sharpe's ratio, better the risk-adjusted return of your mutual fund portfolio.