Most investors in mutual funds just look at the past recent 3 or 5 year returns and usually end up investing in the ones which have the highest returns. There is no guarantee that a fund which has given great past returns will continue to do so and vice versa.
There are other factors which you should look at before selecting the right funds for your investment style and requirements. Here are some of them.
The alpha of a fund shows much returns a fund has generated on a risk adjusted basis compared to the bench mark. The higher the alpha of a fund, it means the fund has generated more returns compared to the benchmark
The beta of a mutual fund measures the volatility of a fund with respect to the index benchmark. The more the beta of a fund, the more it will rise or fall with swings in the index bench mark.
E.g: If the beta of a fund is 2%, and the market increases by 10%, then the value of the fund will increase by 20%.
Similarly, if the market falls 10%, the value of the fund will fall by 20%.
The standard deviation measures the volatility of a fund and how much the returns can deviate from the historical mean or average return. If a fund has give a 15% return and if it’s SD is 5, it means the returns of the fund can range from 10% to 20%.
Higher the Standard Deviation, higher will be the volatility in the fund’s returns so if you are a conservative investor, look for fund s with low SD.
The Sharpe Ratio indicates how much additional returns a fund has generated compared to the risk taken, after deducting risk free returns. The greater the Sharpe Ratio, the better is its risk adjusted return.
If the Sharpe Ratio is negative, it means that the fund has performed worse than risk-less asset in comparison to the risk taken by the fund.
R – Squared
The R- Squared value of a fund shows how much the portfolio returns of a mutual fund are influenced by moves in relation to the index. It’s measured on a scale of 1 to 100.
If the r-squared of a fund is 100, it means that the performance of a fund will move like the performance of the benchmark ( e.g. index funds usually have a R-Squared of 100 )
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