Understanding Mutual Fund Performance Metrics: NAV, Alpha, Beta and More

After many permutations and combinations, you have invested in a mutual fund to accomplish a specific goal. However, how do you measure its performance on various parameters, including returns and risk? As an investor, it’s crucial for you to analyse your fund’s performance to know if it’s on the right track. How to do it? Let’s find out.

Metrics to Gauge Performance of Mutual Funds

There are several metrics through which you can gauge your fund's performance. These include:

Alpha

Once you invest in a mutual fund through a mutual fund app, you can learn about its performance through alpha. Alpha pits a mutual fund's performance against its benchmark index. Every fund has a benchmark index, which you will find in the fund's factsheet. Alpha's baseline is 0.

If a fund's alpha is 0, it means it earns the same returns as the benchmark. If alpha is more than 0, the fund has gained more returns than its benchmark. In other words, it has outperformed its benchmark. On the other hand, if alpha is less than 0, it means the fund has underperformed the index.

Beta

It’s a common fact that mutual funds are volatile. However, market movements don’t affect all funds in a similar fashion. Beta is the metric that helps you gauge a fund’s volatility compared to the benchmark index. The beta of a benchmark index is 1. If your fund’s beta is equal to 1, it indicates the fund moves in line with the benchmark index. If the index moves by 10%, so does the fund.

A beta of more than 1 indicates more volatility. For instance, if a fund’s beta is 1.2, it means if the benchmark index goes up and down by 10%, the fund’s return may fluctuate by 12%. On the other hand, if a fund’s beta is less than 1, it means the fund is less volatile than the benchmark index. So, if a fund’s beta is 0.8, it means if the benchmark index changes by 10%, the fund’s return may change by only 8%.

NAV

You are allotted units whether you invest in mutual funds through systematic investment plans (SIPs) via an SIP app or lumpsum. The cost of each mutual fund unit is called NAV.  While a fund with a higher NAV doesn’t necessarily mean a better fund, NAV matters when you buy or sell a fund. 

Suppose you invest ₹1000 in a fund with a NAV of 10, you get 100 units of the fund. If the fund's NAV is 20, you get  50 units of the fund. Similarly, if you sell 100 units of a fund whose NAV is 50, you get ₹5000 in your account. On the other hand, if a fund's NAV is 25 at the time of sale, you get ₹2500.

Sharpe Ratio

Sharpe ratio, developed by William F Sharpe, helps you understand the returns a fund generates relative to the amount of risk it takes. A higher Sharpe ratio indicates better risk-adjusted returns.

Generally, a mutual fund with a sharpe ratio of more than 1 is considered good while less than 1 is considered not so good. With the help of the Sharpe ratio, you can compare different funds with similar risk profiles.

Portfolio Turnover Ratio

Every mutual fund is helmed by a fund manager. Depending on the fund’s objectives and market situations, the manager buys or sells securities within a specific period, which is measured in terms of portfolio turnover ratio (PTR). 

A high PTR is an indication that the manager frequently buys and sells assets. On the other hand, a low PTR ratio indicates that the manager holds on to the investment for a longer period, buying and selling it less frequently. 

A high PTR may lead to higher transaction costs and might result in high tax implications for you, the investor. The costs are justified if your fund generates higher returns and has a higher PTR. However, you can consider shifting if high PTR doesn’t translate into performance.

Rolling Returns

Providing a more stable view of returns, rather than looking at just the start and end date, rolling returns represent annualised average returns on a specific period, which could be a week, month or a year. With rolling returns, you can get an insight into a fund’s historical performance during a particular timeframe. 

Analysing rolling returns can help you zero in on funds that have delivered positive returns across timeframes. This can provide a strong indication of how a fund is likely to perform in the future.

Conclusion

Using the aforementioned metrics can help provide crucial insights about your mutual fund performance and help in informed decision-making. It can help you identify laggards and pick up better-performing funds.

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