Explained: Which mutual fund ratios should investors check before investing?
Mutual fund risk ratios help investors assess a scheme beyond past returns. Key measures include alpha, beta, R-squared, Sharpe, Treynor, information, Sortino and semi-standard deviation, offering insights into volatility, consistency and risk-adjusted performance.
Investors evaluating mutual funds should consider more than just past performance. Key risk ratios provide valuable insight into a fund's risk profile. Alpha measures the difference between a fund's actual return and its expected return given its level of risk. A positive alpha indicates outperformance, while a negative alpha signals underperformance.
Beta, representing a fund's volatility relative to the market, helps assess systematic risk. An R-square greater than one indicates a reliable beta. The Sharpe ratio evaluates risk-adjusted returns by comparing excess returns to the fund's standard deviation. The Sortino ratio focuses on negative downside volatility. The information ratio gauges a manager's ability to consistently generate excess returns over a benchmark.
Lastly, semi-standard deviation measures downside volatility, providing insight into a fund's potential for losses.
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