Knowledge Centre

  • Knowledge is power
  • Information is liberating
  • Education is the premise of progress, in every society
Mutual Fund | July 09, 2021

Significance of ratios for mutual funds

Here, is the mean of returns, n is the number of returns, and x refers to each individual return. The operator denotes sum. Thus, to calculate standard deviation we subtract each return from its mean, square the deviations and sum them up. Then we divide them by the total number of returns less one, and square root the result. Let’s understand why we use standard deviation.

Standard deviation is a measure of the distribution of a dataset in relation to its mean. Since all funds provide us with mean returns over a period, standard deviation is helpful in measuring the volatility of a fund. A higher standard deviation indicates that the fund’s price tends to fluctuate more, indicating unpredictability of returns. This unpredictability is taken as a proxy for risk in the market, making standard deviation an important metric to judge riskiness of investments.

It is important to note that high or low standard deviation does not necessarily make a good or bad investment. All else constant, lower standard deviation indicates greater consistency of returns, but people who have a higher risk appetite might choose to go with funds that have slightly higher standard deviations. The choice depends entirely on the risk profile of the investor. Also, it must be kept in mind that standard deviation must not be studied in isolation. Because it measures volatility around the mean returns, studying the mean returns themselves is also important before picking the mutual fund that is right for you.

The purpose of the Sharpe ratio is to provide a measure that integrates risk and return. By adjusting the portfolio’s excess returns by its standard deviation, it essentially measures the returns a fund can generate for every unit of risk that it takes. A higher Sharpe Ratio is always desirable as it indicates that the fund is generating higher returns by taking lower risk.

Another important measure of risk is the Beta of a mutual fund.

Thus, it is calculated by dividing the covariance of a portfolio’s returns with the market/benchmark returns, divided by the variance of the market/benchmark returns.

The purpose of beta is to track the volatility of your investment with relation to the market. The beta is centered around 1 as the market has a beta of 1. Thus, a portfolio with a beta higher than 1 is more volatile than the average market, while a beta lesser than 1 indicates lower-than-market volatility. Let’s take an example. Suppose a mutual fund has a beta of 1.15. This indicates that for every 1 point of deviation in the market, we expect the mutual fund’s value to change by 1.15 points. Thus, it is a fund which is riskier than the market.

Much like standard deviation, we cannot establish a thumb rule as to whether a high or low beta is desirable. The beta is merely a measure of risk. Higher betas raise the expected return of an investment as the fund manager is taking on more risk, while lower betas indicate safer investments.

The final ratio we will discuss is alpha.

Alpha measures the excess returns a fund is generating as compared to its expected return, based on its beta. For example, an alpha of 3% indicates that the fund is generating 3% more returns than it is expected to, based on the riskiness of its investments. It is taken as a valuable measure of the quality of a fund and particularly its fund manager. We look for higher alphas as they indicate that the fund can generate market-beating returns.

Finally, investors must keep in mind that ratios must be tracked over time. Consistency across them is important. For example, a fund with a positive alpha currently but with negative alphas in previous periods is something that must be treated with caution. So go ahead, study the ratios of your mutual funds, and decide what’s best for you based on your own risk profile.

Mutual Fund Form

Related Blogs

Frequently Asked Questions


Important Message The information contained in this file is provided for informational purposes only, and should not be construed as legal advice on any matter. The content and interpretation of the law addressed herein is subject to revision. We disclaim all liability in respect to actions taken or not taken based on any or all the contents of this file to the fullest extent permitted by law. Every effort is made to avoid errors. In spite of that, errors and discrepancies may creep in. It is expressly stated that neither Findoc Investmart Private Limited nor any of the contributors of updates will be responsible for any damage to anybody on the basis of this document. Readers are, therefore, requested to cross check with the original sources e.g. Government publications, Orders, Judgments etc., before taking any action or making any decision. These services are being provided through our group companies Findoc Capital Mart Pvt Ltd and Findoc Finvest Private Limited

Attention Investors
  • 1. Stock Brokers can accept securities as margin from clients only by way of pledge in the depository system w.e.f. September 1, 2020.
  • 2. Update your mobile number & email Id with your stock broker/depository participant and receive OTP directly from depository on your email id and/or mobile number to create pledge.
  • 3. Pay 20% upfront margin of the transaction value to trade in cash market segment.
  • 4. Check your securities / MF / bonds in the consolidated account statement issued by NSDL/CDSL every month.
  • 5.Investments in securities market are subject to market risks, read all the related documents carefully before investing.
  • 6.The securities are quoted as an example and not as a recommendation.
No need to issue cheques by investors while subscribing to IPO. Just write the bank account number and sign in the application form to authorise your bank to make payment in case of allotment. No worries forrefund as the money remains in investors account.
Prevent Unauthorized Transactions in your demat account --> Update your Mobile Number with your Depository Participant. Receive alerts on your Registered Mobile for all debit and other important transactions in your demat account directly from NSDLon thesame day.....issued in the interest of investors.
KYC is a one-time exercise while dealing in securities markets-once KYC is done through a SEBI registered intermediary (broker, DP, Mutual Fund etc.), you need not undergo the same process again when you approach another intermediary. | (As instructed by SEBI, We hereby declare that we do engage in proprietary trading in all segment across the exchange.)
Effective communication & Speedy redressal of the grievances a. Register on SCORES portal b. Mandatory details for filing complaints on SCORES: i. Name, PAN, Address, Mobile Number, Email ID c. Benefits: i. Effective communication ii. Speedy redressal of the grievances link:
In case of grievances for any of the services rendered by Findoc Investmart Pvt Ltd write an email to
Mandatory updation of certain attributes of KYC of clients - The advisory is also displayed on the Depository website at following link:
1. NSDL:IN-DP-469-2020 2. Findoc Finvest Pvt. LTD. CIN no:U65910CH1995PTC016409 RBI REGISTRATION NO. B-06.00267 3. Findoc Investmart Private Limited CIN no:U74992CH2010PTC035180 SEBI REGISTRATION NO. INZ000164436 4. Findoc Investmart IFSC PVT. LTD CIN no: U65999GJ2017PTC095984 SEBI REGISTRATION NO. INZ000200735 5. INVESTMENT ADVISOR SEBI Registration no. INA100012297

Member I'd | Nse- 14697 | BSE- 6529 | MCX- 55205 | NCDEX- 01152


Registered Office :

1210/1211/1212/1213,1213A, Exchange Plaza, Near Mercury Hotel, Opp. WTC Tower, Gift City, Gandhi Nagar- 382355, Gujarat, India

Corporate Office :

4th Floor, Kartar Bhawan, Near PAU Gate No.1, Ferozepur Road Ludhiana -141001.

Copyright © 2024 FINDOC INVESTMART PVT. LTD. All Rights Reserved.

Developed & Content Powered by Accord Fintech Pvt. Ltd.

Open a Demat Account