Skip to main content

Know the alpha, beta of your mutual fund returns

Invest Mutual Funds Online

Call 0 94 8300 8300 (India) 

RETURNS yielded by your investments in mutual funds are very important. However, knowledge about how to read and interpret that data is more important, because future decisions may be based on these numbers and if you read something other than what it is supposed to convey, it may influence your decisions in the wrong way.

Let us make a beginning in deciphering mutual fund returns.


Annualisation: Normally, returns from equity-oriented mutual funds are expressed as absolute numbers. The volatility in equity markets are higher than in debt markets and the degree of certainty of similar returns being earned over the rest of the year is lower, hence it would not be correct to annualise it.

For example, if an equity fund has yielded three per cent over three months, simple annualisation implies 12 per cent, but returns over the next nine months may be much higher or much lower so as to make the returns over the entire year something very different from 12 per cent.


In case of fixed income/debt-oriented funds, returns are expressed as annu alised. While there may be volatility in the balance part of the year, it would be lower than the volatility in the equity market.


Mode of annualisation: In liquid/debt funds, returns are expressed as annualised. Annualisation may be simple or compounded.


As a matter of rule, returns less than one year are simple annualised and for more than one year, it is compound annualised.

To give an example, if a debt fund has given five per cent return over six months, it would be expressed as 10 per cent. If it were compound annualised (it is not, just for the sake of awareness) it would have been expressed as 10.25 per cent. If you are not aware that the return of 10 per cent is annualised, you would perceive that it has given absolute 10 per cent over six months. If a debt fund has given 30 per cent return over three years (a period more than one year), since it is compound annualised, it is not expressed as 10 per cent per year, but as 9.14 per cent per year.


Technically, it is called CAGR.


Volatility of returns: There is a concept called `risk adjusted returns' ­ it means a fund has performed well not only if it has given higher returns, but also if the volatility of returns over the period were lower as well. A fund with a lower volatility is said to have performed better than a fund with higher volatility. The expression for risk-adjusted ratio is through the sharpe ratio, which is the return over the period minus he risk free rate of return, divided by the standard deviation of returns over the period.

For example, let us assume the risk free rate as seven per cent (yield on one-year treasury bill), the return over the period as 12 per cent and the standard deviation of returns over the period as 0.3. Then the sharpe ratio is (12-7)/0.3= 0.167. If another fund has given 10 per cent return over the period with a standard deviation of 0.15, its sharpe ratio is (107)/0.15 = 0.2, hence it has performed better than the previous fund.


Outperforming the benchmark: A fund is supposed to have performed well, if it has given returns higher than the benchmark, because the investor had the choice of investing in the benchmark -there should be some reason to invest in this particular fund. This is expressed through the `alpha'.

It is measured as: Jensen's Alpha = portfolio return [risk free rate + portfolio beta * (market return risk free rate)]. Portfolio beta means the extent to which it follows market returns.

The investor may not have the data to calculate sharpe ratio or alpha for himself, but the number as such may be published by the AMC in the factsheet. With awareness of the various measures to calculate risk-adjusted returns, he would be better placed to understand the implications. A simple search on the internet would reveal the definition of any term in the AMC literature which is not known to the investor.

 

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

 

---------------------------------------------

Invest Mutual Funds Online

Transact Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Fund Application Forms

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online

      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online

      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online

      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online

      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver Mutual  Funds  Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online

      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

 

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

EPFO can pay 8.5% interest in 2009-10

THE Employees’ Provident Fund Organisation can comfortably offer 8.5% interest rate to its 4.41 crore depositors during 2009-10 and still record a surplus contrary to Rs 139-crore losses suffered by it for giving the same benefit during the current fiscal. The issue of return to the depositors would be discussed at a meeting of the ‘finance and investment committee’ (FIC) on Thursday, agenda for which lists that maintaining an 8.5% interest could still give the fund a surplus of Rs 6.4 crore on the investment made by the fund. If EPFO maintains the interest rate of 8.5% on PF deposits, there will be a surplus of Rs 6.4 crore at an estimated income of Rs 12,994 crore in 2009-10. In case the interest is raised to 8.75%, the fund would suffer a loss of Rs 366.77 crore and the deficit would be still higher at Rs 739.94 crore if the rate of interest is fixed at 9%. FIC gives recommendations on financial matters to the apex EPFO body Central Board of Trustees (CBT), which takes the final ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now