When analysing mutual fund performance, two important metrics often used are Alpha and Beta. These are part of a set of investment tools called risk-adjusted return measures. Don’t worry—they sound complex, but here’s a simple explanation.
Alpha is a measure of how well a mutual fund has performed compared to its benchmark index (like the Nifty 50 or Sensex). If a fund has an Alpha of +2, it means the fund outperformed its benchmark by 2%. An Alpha of -1 means the fund underperformed the benchmark by 1%.
Example: If the benchmark index gave 10% returns and your fund gave 12%, the alpha is +2%.
Beta measures a mutual fund’s volatility or risk in comparison to the market. A Beta of 1 means the fund moves in line with the market. A Beta greater than 1 means the fund is more volatile than the market. A Beta less than 1 means the fund is less volatile than the market.
Example: If a fund has a Beta of 1.2, and the market goes up by 10%, the fund is expected to go up by 12%. But the same goes for downward movements too.
Understanding Alpha and Beta helps you go beyond just looking at past returns. By combining both, investors can make better decisions based on returns vs. risk.
