What are Alpha and Beta in Mutual Fund?

Factors like investment objective, tenure, risk profile, and age are essential for selecting the right mutual fund category. But once a category is selected, investors also need to browse through hundreds of schemes from that category to make the right investment decision.Performance parameters like alpha and beta can make this part of mutual fund selection easier. Take a look at what they are and how they can help you-

In layman terms, alpha is used for measuring the fund performance against its benchmark. For mutual funds, the baseline alpha is considered to be 0. If the alpha of a mutual fund category is negative, it suggests that the performance of the particular fund was underwhelming as compared to its benchmark index. A positive alpha indicates the opposite.For instance, if the alpha of a mutual fund scheme is 5.0, it suggests that it outperformed its benchmark index by 5%.

Beta measures the sensitivity of a mutual fund scheme against its benchmark index. For mutual funds, the baseline beta is 1. Schemes with a beta of 1 show the same level of variation against its benchmark index. If it is higher than 1, it suggests that the scheme shows a higher level of variation than its benchmark. A beta lower than 1 indicates the opposite.For instance, if the beta of your selected fund is 0.70, it indicates that if the benchmark index of the fund moves by 1 point, the value of the fund will move by 0.70 points.

The following formula is used for calculating the alpha and beta of a mutual fund scheme-

Covariance indicates how two different stocks react against each other in various market conditions. On the other hand, variance represents the volatility in the price of a scheme across a period.Investors don’t need to get involved in these complex calculations of alpha and beta in mutual funds . You can easily find these details on the official website of the fund house or other 3rdparty websites that track mutual fund performance.

Alpha and beta are crucial performance indicators that help you better analyse and compare the performance of mutual fund schemes. But if you are new to mutual funds, do consider professional help to avoid making expensive mistakes.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.