Skip to main content

High Alpha Funds or Low Beta Funds


 
 
For investors in actively managed equity mutual funds, the worth of a fund lies in how much return it is able to generate over that given by the relevant benchmark. So, at a basic level, the choice of fund will have to be driven by how much value a fund manager is adding vis-a-vis an index.

Alpha, which measures this value addition, is often taken as a metric to gauge fund performance. Investors who seek outperformance would be drawn towards funds running a higher alpha. But can investors always benefit from the pursuit of high alpha?

IMPORTANCE OF ALPHA

Simply told, alpha is the excess return delivered by a fund over its benchmark index. But more precisely , it is the excess return or value generated by a fund manager over the fund's expected return. This expected performance is based on the risk taken by the fund manager relative to the market, which is defined by beta.

Thus, a fund's alpha is derived from its underlying beta. A beta value of 1.5 indicates the fund would deliver 1.5% return for every 1% gain in the value of its underlying index.

Suppose a fund with a beta of 1.5 delivers a return of 18% over a certain period while its underlying benchmark index posts 12% returns. Given the beta, the fund manager would be expected to deliver a return of 18% (12%*1. 5). So, in this case, the fund manager has actually failed to generate alpha even though the fund has delivered 6% excess return over its benchmark.

If the fund delivered a return of 20% for the same underlying risk, the alpha generated would be 2%. Which implies that alpha represents the fund manager's expertise in stock selection or portfolio building. Most top-performing funds over longer time periods boast of a high alpha. In most cases, if a fund has generated high alpha in the past, it is likely to generate the same in the future too. Thus, it would bode well for investors to pay attention to a fund's alpha when selecting equity funds.

However, experts insist that consistency in delivering alpha is critical. Certain funds are good at delivering alpha only during a market uptrend.The fund should show consistency in generating alpha across various time frames and market cycles. Alpha can be a good indicator of a fund manager's ability provided there is consistency in the philosophy and processes driving the portfolio selection. Also, bear in mind that extent of alpha varies between fund categories. Typically, mid-cap oriented equity funds are able to deliver higher alpha than large-cap oriented ones. While mid-cap funds can comfortably clock alpha in excess of 8-10%, alpha in large-cap funds is typically lower.

WHERE ALPHA MAY NOT WORK

Alpha as a metric has a few shortcomings, which can make its extensive use counter-productive. First, alpha depends on the underlying benchmark index for the fund. Even though we may measure it in absolute terms, alpha is actually a relative measure dependent on market proxy . This can have several implications.

It can prevent effective comparison between funds, even within the same fund category . Since different equity funds within the same category also tend to be benchmarked against different indices, the alpha statistic will measure outperformance relative to that benchmark. You can end up comparing apples to oranges.

Besides, since it measures performance relative to beta, the accuracy of alpha depends on the credibility of the beta measure. The beta value of a fund may be flawed if its correlation to the underlying index is very low. So, a fund's alpha may be misleading if it does not have high correlation to the benchmark it is being compared with.
 

Another gripe analysts have with using alpha is that it is ignorant of the risk-adjusted performance. While it measures excess return given the level of market risk, it makes no adjustment for the risk involved in delivering that additional performance. As such, experts insist that alpha should not be used in isolation while picking funds.It should be supplemented with other metrics to really gain true understanding of the performance of the fund. Investors give equal importance to the underlying risk.  Go with a fund offering healthy alpha but lower beta.

Birla Sun Life Pure Value, for example, has delivered a healthy alpha of 10% over the past five years with a beta of 1.06. Its peer in the same category , BNP Paribas Midcap Fund has delivered similar return although at a lower beta of 0.83. Belapurkar says just looking at alpha does not provide the entire picture. Investors need to dissect the number further to see where the alpha is actually coming from. If it is due to a high risk taken by the fund manager, then it could be a red flag. Investors need to consider other risk factors apart from beta.

For instance, a large-cap fund taking high exposure to midor smallcap stocks would likely fetch a high alpha but that doesn't reflect the fund manager's acumen. Finally, investors should understand that past performance is not and never should be relied on as indicator of future performance.

 Buy Mutual Fund Online

-----------------------------------------------
Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds

Top 10 Tax Saver Mutual Funds to invest in India for 2017

Best 10 ELSS Mutual Funds in India for 2017

1. BNP Paribas Long Term Equity Fund

2. Axis Tax Saver Fund

3. Franklin India TaxShield

4. ICICI Prudential Long Term Equity Fund

5. IDFC Tax Advantage (ELSS) Fund

6. Birla Sun Life Tax Relief 96

7. DSP BlackRock Tax Saver Fund

8. Reliance Tax Saver (ELSS) Fund

9. Religare Tax Plan

10. Birla Sun Life Tax Plan

Invest in Best Performing 2017 Tax Saver Mutual Funds Online

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

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

Leave your comment with mail ID and we will answer them

OR

You can write to us at

PrajnaCapital [at] Gmail [dot] Com

OR

Leave a missed Call on 94 8300 8300

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

Popular posts from this blog

Mutual Fund Review: Religare Tax Plan

Tax Plan is one of the better performing schemes from Religare Asset Management. Existing investors can redeem their investment after three years. But given the scheme's performance, they can continue to stay invested   Given the mandated lock-in period of three years, tax saving schemes give the fund manager the leeway to invest in ideas that may take time to nurture. Religare Tax Plan's investment ideas revolve around 'High Growth', which the fund manager has aimed to achieve by digging out promising stories/businesses in the mid-cap segment. Within the space, consumer staples has been the centre of attention for the last couple of years and can be seen as one of the key reasons for the scheme's outperformance as compared to the broader market. It has, however, tweaked its focus and reduced exposure in midcaps as they were commanding a high premium. The strategy seems to have worked as it returned a 22% gain last year. Religare Tax Plan has outperformed BSE 100...

JP Morgan launches Emerging Markets Opportunities Equity Offshore Fund

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 JP Morgan launches Emerging Markets Opportunities Equity Offshore Fund    The new fund offer opens for subscription on 16 th June and closes on 30 th June. JP Morgan Mutual Fund today announced the launch of its open end fund of fund called Emerging Markets Opportunities Equity Offshore Fund. The fund will invest in an aggressively managed portfolio of emerging market companies in the underlying fund - JPMorgan Funds - Emerging Markets Opportunities Fund, says a JP Morgan press release. Noriko Kuroki, Client Portfolio Manager, Global Emerging Markets Team (Singapore), JPMAM said, "Emerging markets have been out of favour for several years, as growth decelerated and earnings struggled. However, in a world of globalisation, we believe that EM will eventually re-couple with DM, leading to the long-aw...

Nifty F&O

  1. What is a straddle? A strategy using Nifty options usually before a major event or when one is uncertain of market direction. Comprises purchase of a Nifty call and put option of the same strike price. Usually strikes are purchased closer to the level of the underlying index. 2. What is better ­ buying or selling a straddle? It depends.Implied volatili ty of options, or near-term expectations of price swings in an un derlier like Nifty , usually peaks before an event and falls when the outcome plays out ­ like Infy re sults in past years. However, once the event plays out, a sharp rise or fall in Nifty could result in price of the straddle rising ­ benefiting buy ers. But, normally , those who sell or write options charge hefty premiums from buyers in the hope that fall in volatility would ensure the options end out-of-the-money, hurting buyers. 3. So, do straddle sellers end up winning most of the time? Yes. That's invariably the case when market volatility is trending on the...

UTI Equity Fund Invest Online

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   UTI Equity Fund   Invest Online UTI Equity is a large cap-oriented fund with assets under management worth Rs. 2,269 crore (as on June 30, 2013). The fund was originally launched in May 1992 as UTI Mastergain and is benchmarked against S&P BSE 100. A couple of years back the name of the fund was changed to UTI Equity Fund and many of the smaller funds of UTI were merged into this fund. Performance The fund has outperformed its benchmark as well as the equity diversified category average in the last one-, three- and five-year periods. It has repeated the same in 2013 (as on May 31). Since its inception the fund has delivered an impressive 26 per cent compounded annual growth rate which is superior to its benchmark performance in the same period. Y...

Good time to invest in Infrastructure Funds

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   Good time to invest in infrastructure The Sensex has gained almost 10 per cent from May 15 till date, while the CNX Infrastructure Index has gained almost 17 per cent in the period. The price to earnings ( P/ E) ratio of the BSE Sensex is 18.96; for the CNX Infrastructure Index, it is 24.57. The estimated P/ E for next year is 14.04 for the Sensex. Of the 24 companies that make up the CNX Infrastructure Index, six have a P/ E higher than 20. Does this mean infrastructure is fairly valued? Or, has it run up quite a bit? According to experts, barring stray companies, the infra sector is fairly valued and it is a good time to invest. Even if some companies are facing debt restructuring problems, once interest rates come down and regulatory norms become flexible, they will start giving good re...
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