Key Ratios you should know before choosing a Mutual Fund...

BETA Ratio

This common measure compares a mutual fund’s volatility with that of a benchmark index. It gives a sense of how much you can expect a fund’s returns to move up or down, given the swing in its benchmark. A fund with a beta of 1 will move in tandem with the market. A beta greater than 1 indicates that a fund’s return will fluctuate more than the index gains... Conservative investors looking to preserve capital should focus on portfolios with beta values less than one, since it signifies lesser volatility in returns relative to that of the benchmark. Investors with a higher risk appetite may prefer funds with higher beta, since it tends to amplify the gains of the benchmark.

ALPHA Ratio

Alpha is the difference between a fund’s expected return based on its beta and its actual returns. Alpha is sometimes interpreted as the value that a portfolio manager adds above and beyond a relevant index’s risk/reward profile. If a fund returns more than what you’d expect given its beta, it has a positive alpha. If instead it earns lower than anticipated return, its alpha is negative. Though higher alpha is desirable, this measure of a fund’s performance should be used cautiously while evaluating funds that are not fully diversified. This is because funds with less diversified portfolios are prone to the company-specific risks.

SORTINO Ratio

The Sortino ratio highlights whether the returns on an investment are due to smart investment decisions or merely due to the excess risk taken by the fund manager. This measurement is very useful because it tells us if the higher returns are accompanied by a higher risk. Sortino ratio penalizes only those returns falling below a user-specified target. The greater an investment’s Sortino ratio, the better is its risk-adjusted performance.

EXPENSE Ratio

Though this ratio does not measure the risk related to the mutual fund, it certainly impacts the investor’s returns. Expense ratio is a percentage of fees paid to the mutual fund company to manage and operate the fund. Since this is charged regularly (annually) a high expense ratio over the long term may eat into your returns massively through the power of compounding. For instance, Rs 1 lakh over 10 years at the rate of 15% will grow to Rs 4.05 lakh. But if we consider an expense ratio of 1.5%, your total returns would actually be Rs 3.55 lakh, nearly 14% less than what would have been achieved without any expense charge. So, the lower the expense ratio, the higher returns one would enjoy in future.

Source: ICRA/Value Research