Apart from traditional investments, when we talk about investment options with high returns, mutual funds are definitely talked about. Since investing in mutual funds involves market risks, it is important to understand the risks associated with a fund before investing. Mutual fund investing involves some risks. The risks involved in mutual funds may vary depending on the fund. As an investor, it is important for you to know about the risks in mutual fund investing. There are many ways through which you can measure them.
Important metrics to help you measure mutual fund risk
There are many factors behind the risk of mutual funds. These include changes in the economy, interest rates, geopolitical conditions, company management, etc., all contribute to the risk of mutual funds. This risk is measurable while analyzing and selecting a fund. There are some ways to do this.
beta
According to Kotak Securities, beta helps measure the relative volatility of a fund compared to its benchmark. It measures how likely a fund is to experience wide fluctuations in value. Always on a benchmark of 1, if a fund’s beta is less than 1, it is less sensitive to the benchmark. On the other hand, if it is greater than 1, it indicates greater sensitivity. If a fund’s beta is 1, it is likely to outperform the benchmark or the market. If you have a conservative outlook, you can choose a fund with low beta and vice versa.
R-square
R-Square helps measure the correlation of a fund with its benchmark performance on a scale of 100. The R-squared value of a fund gives an idea of ​​its performance relative to the overall market. A higher value indicates that the fund’s performance is close to the benchmark index. You can use this to choose a fund.
Standard Deviation
Standard deviation helps measure the volatility around a fund’s average returns. In other words, it shows how much a fund’s returns can differ from the average return. According to Kotak Securities, suppose the average annual return of a fund is 13% and the standard deviation is 2%. That means the fund’s returns can deviate by + or -2% on either side and range from 11% to 15%. The greater the standard deviation, the greater the volatility.
sharpe ratio
The Sharpe ratio helps you understand whether a fund’s returns are due to the fund manager’s prudent investment decisions or a result of excessive risk. This ratio is helpful while comparing multiple funds to find out which fund is giving better risk adjusted returns. This ratio is obtained by subtracting the fund’s risk-free return from its return and dividing the result by the standard deviation.
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