A mutual fund is one of them, buzzing investment options in today’s time. And is the preferred choice of many people out there. But today in this article we would help you understand how you can measure the risk related to mutual funds-
1] What are Mutual Funds?
A Mutual Fund is a professionally managed fund, where money is pooled from several investors to invest in Securities. Mutual funds are usually distinguished based on their principal investment. Such as Money market funds, bonds or fixed-income funds, and equity funds. They may have a combination of some of them, which is known as a hybrid fund. Also, you get a wide variety of options while investing in mutual funds as there are Mutual funds based on an index known as an index fund, you also find mutual funds that are based on a certain sector. The person who manages the Mutual fund is known as the fund manager. The average return on mutual funds falls somewhere between 8-12%. But some may go as high as 30-35% if you’re lucky enough. The main advantages of the mutual fund include low risk, professional management, and diversification. A mutual fund is increasingly becoming a favoured choice of investors as it doesn’t require much time to research, you just have to find a good fund and you start with as low as ₹100 with SIP.
Top 4 risk indicators in a Mutual fund-
1. Alpha- Alpha is not entirely a risk measure. It is used as a comparison against the benchmark index, to understand how well or poorly the fund performed as compared to the benchmark. The benchmark could be one of these, Nifty-50, Sensex, etc. If Nifty-50 provided 10% returns in the past 3 years and the mutual fund provided a return of 12% then the Alpha would be +2% if the fund provided a return of 8% then the alpha would have been -2%. The alpha rate also depends on the benchmark you compare it to. The alpha would help your fund have performed as compared to other investment options.
2. Beta- Beta is somewhat similar to alpha, it is also measured against a benchmark. Beta suggests the risk measure of the fund, but it doesn’t indicate the inherent risk of the fund but its comparison with a benchmark. The benchmark is always 1 and if the fund is at 2 while the benchmark is at 1 then if the risk factor of the benchmark increases by 1 then the risk factor of the fund would also go up by 1 resulting in 3.
3. R- Squared This indicator aims to measure fund performance in correlation to its benchmark index. This is done on a scale of 100. If the fund has performed similar to Benchmark then the fund would have a R-Square of 99 or 100, if the fund has performed worse than the index then it would have a R-Square of 80 and if it has performed better than it would have been 120 or something. This would help you understand if it is really worth investing in that fund, or you would just get returns similar to that of Benchmark.
4. Standard deviation
Standard deviation is one of the best indicators to understand how much returns a fund would provide. For example, if your fund provides a 10% average over a period of time. But sometimes, in months the firm could provide 20% returns or sometimes -15% returns. This indicator is a thumb rule that says, 68% of the time you can expect a return of 3% more or less than the average return. It could either be 3% more 10% + 3%=13 % or if on the lower side 10% – 3% = 7%. And also there is another rule that works 95% or the time that means if the range would be anywhere between 3% x 2= 6%. This means it could be either 6% less or more, anywhere between 4% to 16%.
In Closing- Here in this article, we have provided you guys with some of the best Risk indicators which would help you understand more about Mutual funds, and eventually help in better decision making.
1] What are Mutual Funds?
A Mutual Fund is a professionally managed fund, where money is pooled from several investors to invest in Securities. Mutual funds are usually distinguished based on their principal investment. Such as Money market funds, bonds or fixed-income funds, and equity funds. They may have a combination of some of them, which is known as a hybrid fund. Also, you get a wide variety of options while investing in mutual funds as there are Mutual funds based on an index known as an index fund, you also find mutual funds that are based on a certain sector. The person who manages the Mutual fund is known as the fund manager. The average return on mutual funds falls somewhere between 8-12%. But some may go as high as 30-35% if you’re lucky enough. The main advantages of the mutual fund include low risk, professional management, and diversification. A mutual fund is increasingly becoming a favoured choice of investors as it doesn’t require much time to research, you just have to find a good fund and you start with as low as ₹100 with SIP.
Top 4 risk indicators in a Mutual fund-
1. Alpha- Alpha is not entirely a risk measure. It is used as a comparison against the benchmark index, to understand how well or poorly the fund performed as compared to the benchmark. The benchmark could be one of these, Nifty-50, Sensex, etc. If Nifty-50 provided 10% returns in the past 3 years and the mutual fund provided a return of 12% then the Alpha would be +2% if the fund provided a return of 8% then the alpha would have been -2%. The alpha rate also depends on the benchmark you compare it to. The alpha would help your fund have performed as compared to other investment options.
2. Beta- Beta is somewhat similar to alpha, it is also measured against a benchmark. Beta suggests the risk measure of the fund, but it doesn’t indicate the inherent risk of the fund but its comparison with a benchmark. The benchmark is always 1 and if the fund is at 2 while the benchmark is at 1 then if the risk factor of the benchmark increases by 1 then the risk factor of the fund would also go up by 1 resulting in 3.
3. R- Squared This indicator aims to measure fund performance in correlation to its benchmark index. This is done on a scale of 100. If the fund has performed similar to Benchmark then the fund would have a R-Square of 99 or 100, if the fund has performed worse than the index then it would have a R-Square of 80 and if it has performed better than it would have been 120 or something. This would help you understand if it is really worth investing in that fund, or you would just get returns similar to that of Benchmark.
4. Standard deviation
Standard deviation is one of the best indicators to understand how much returns a fund would provide. For example, if your fund provides a 10% average over a period of time. But sometimes, in months the firm could provide 20% returns or sometimes -15% returns. This indicator is a thumb rule that says, 68% of the time you can expect a return of 3% more or less than the average return. It could either be 3% more 10% + 3%=13 % or if on the lower side 10% – 3% = 7%. And also there is another rule that works 95% or the time that means if the range would be anywhere between 3% x 2= 6%. This means it could be either 6% less or more, anywhere between 4% to 16%.
In Closing- Here in this article, we have provided you guys with some of the best Risk indicators which would help you understand more about Mutual funds, and eventually help in better decision making.