Only past returns should not be the parameter for Mutual funds or any asset class investments.
It's a bad investment decision, If you choose an asset class looking at past returns.
Here's how we shortlist funds for your investments.
Mutual fund risk ratios explained with an example
Nippon India Multi Cap vs Quant Multi Cap, using 3 year data:
1. Standard Deviation
Measures how much the fund's returns fluctuate.
- Nippon: 15.31%
- Quant: 18.11%
Lower generally means the fund has been less volatile.
2. Beta
Shows how sensitive the fund is to market movements.
- Nippon: 0.89
- Quant: 1.03
A beta of 1 means the fund moves broadly with the market. Above 1 means higher sensitivity, below 1 means lower sensitivity.
3. Sharpe Ratio
Shows how much return the fund generated for the total risk taken.
- Nippon: 0.58
- Quant: 0.30
Higher is generally better. It tells you whether the returns justify the overall risk taken.
4. Sortino Ratio
Similar to Sharpe, but focuses only on downside volatility.
- Nippon: 0.78
- Quant: 0.48
Higher means better returns for the downside risk taken.
5. Alpha
Measures the fund's excess return over its benchmark on a risk adjusted basis.
- Nippon: 3.04
- Quant: -1.37
Positive alpha means the fund has generated returns above its benchmark after adjusting for risk.
6. Information Ratio
Measures how consistently a fund beats its benchmark.
- Nippon: 0.35
- Quant: 0.10
Higher = more consistent benchmark outperformance.
Don't just look at returns, understand the risk behind them.
Blog by Mr. Santosh G Akerkar for educational and awareness purposes only.
