POSTED BY December 25, 2011 10:02 pm COMMENTS (9)
ONKindly let me know any website where i can check below ratios for All Equity Mutual Funds.
• Alpha
• Beta versus a Standard Index
• R Squared versus a Standard Index
• Standard Deviation
• Sharpe Ratio
If possible, Kindly Explain significance of each ratio precisely.
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– Look for track record (return and SD) of at least 10 years. If not available then for 5 years.
– Don’t go for fund that is less than 3 yrs old
– Look at Morningstar india and valuereasearch for the funds you have shortlisted and look for the mentioned parameters and compare the funds.
I would not dismiss all of them as ‘completely’ useless. For one, IN 2011, some of the regular toppers in MF, were beaten by several others – until this point – non descript schemes. Most ratings give weightage to returns. But what you will see is the current toppers have a higher Standard deviation (SD).
Only a few few people in our country, if at all, knowingly decide to avoid new ‘performance toppers’ which is correct. Investors usually flock to funds with the highest returns in a year regardless of the bold statement “Past performance does not guaratee future performance”. If the SD of the new scheme is higher then the next year there may not be much consistency in returns – consistency can be found in long term performers which incidentally have lower SD. Each of these features can be used to select a MF,really. I agree it is an overkill for an individual investor to analyze the minutae of information to purchase a M fund but many of these parameters need to be ascertained at least to exit a fund (ie) As long as many of the parameters do not deteriorate one should stick to the selected fund.
The main thing is that all these ratios are calculated for last 1 year and you actually want to compare funds over 5-10 years. And even after the most rigorous of your efforts, you will fail because you would not be able to predict the future performance.
Additionally, beside your fund performance, how are YOU, the investor, going to behave. Are you going to stick to a well-managed fund for some years, if it undergoes underperformance (which any fund can do) or you are going to chop-and-churn.
There are lot of things to consider. And in all those things, you will realise that these ratios are ‘worthless’.
I hope you understand that all this is absolutely worthless.
Just remember that these ratios are dynamic and change with the performance of the funds that you invest in. It would be better for you to invest based on mutual fund returns than these ratios.
Narayan
Thanks for your Follow-Up.
justgrowmymoney,
I already selected couple of mutual funds in each category like large,mid,multicap&Smallcap. Now i want to check above rations for each Mutual fund across category.
In simple words:
Alpha: The excess return as compared to Index. If Index returns 10% and your MF generates 13% your alpha is 3%.
Beta: The relative movement of a stock/MF versus the index. If the index moves up 10% and the stock moves up 20% the Beta is 1.2/1.1 = 1.09
R Squared versus a Standard Index: Is not an applicable term. R Squared just explains the how much level of deviation is explained by known factors so a R Squared of 0.92 implies that the Standard Deviation of the stock/MF is explained upto 92%. Higher the R Squared the better.
Standard Deviation: Explains how much the performance deviates from a mean. The lower the SD the better.
Sharpe Ratio: The return for every additioanl extra unit of risk. [Instrument return/[Required return minus risk free rate].
In a nutshell:
Higher is better for:
– Alpha
– R Squared
– Sharpe Ratio
Lower is better for:
– Beta
– SD
Why would you just start looking at these parameters alone?
Dear E viswanath, kindly google each term to understand better. Regarding the ratios for indian MFs, you may check @ VROL, Morningstar, ICRA to name a few.
Thanks
Ashal