The mutual funds ratios you need to know

Kavya Balaji   /   January 28, 2020
Mutual fund ratio

Statistical analysis of mutual funds requires a fundamental knowledge of quantitative measures. These measures include Beta, R-squared, Alpha, Sharpe Ratio, Expense Ratio and other ratios. Here’s a primer on them.


Beta is a measure of a fund’s movements (ups and downs) compared to the overall market. In simple words, beta denotes the sensitivity of the fund towards market movements. It is a measure of the volatility of the fund’s portfolio to the market. Here, the market refers to the benchmark index the fund follows.

The beta of the market or the benchmark is always taken as 1. A beta of 1 indicates that the fund’s Net Asset Value (NAV) will move in step with the market. Any beta of less than 1 denotes lower volatility and higher than 1 denotes more volatility compared to the benchmark index. For instance, if a fund’s beta is 1.2, it is theoretically 20% more volatile than the market.

If you wish to preserve your capital, you should focus on funds with low betas and if you are willing to take on more risk for higher returns, you could look for high beta funds.


R-squared is the percentage of a fund’s movements that can be explained by movements in its benchmark index. An R-squared of 100 indicates that all of the fund’s movements can be explained by movements in the index. R-squared values range from 0 to 100. Usually, a mutual fund with an R-squared value between 85 and 100 is closely correlated to the index. A fund with an R-squared of 70 or less typically does not perform like the index.

R-squared helps you check how similar a particular fund may be to a given index. For instance, if you already have a Nifty 50 fund in your portfolio, you won’t want to add another fund with an R-squared of 0.99 because this indicates a correlation of 99% to Nifty 50. The chosen fund will perform almost identical to the Nifty 50 fund already in your portfolio. Your portfolio will not be diversified. 

You should avoid actively managed funds with high R-squared ratios. Why? It makes no sense to pay fees for professional management when you can get the same or better results from an index fund.


Alpha is a measure of a fund’s performance on a risk-adjusted basis. It gives you an idea of how much value the fund manager adds to or subtracts from the fund. The excess return of the fund relative to the return of the benchmark index is its alpha. 

Alpha can be negative or positive. An alpha of 1 means that the fund has outperformed its benchmark index by 1% and an alpha of -1.0 will indicate an under-performance of 1%. So, the higher the alpha the better.

Standard Deviation

Standard deviation is the deviation or dispersion of the data from the mean or average. For mutual funds, a fund’s standard deviation tells you how much the return from your fund is straying from the expected return. This is based on the fund’s historical performance. 

For instance, if a fund has a standard deviation of 7% and gives returns of 16% on an average, it means that it has a tendency of straying by 7% from the expected average return and may give returns between 8% to 23%. Standard deviation is used to measure volatility too as it is directly proportional to the volatility of the fund. 

Sharpe Ratio

The Sharpe ratio uses standard deviation to measure a fund’s risk adjusted returns. It is calculated by subtracting the risk-free rate of return (govt. security rates) from the fund’s rate of return and dividing the result by the fund’s standard deviation.  

Using this ratio, you can see how well the return of a particular fund compensates you for the risk taken. For instance, high returns for taking an average or below-average risk is favourable. So, the higher the Sharpe Ratio, the better.

Average Maturity 

This is applicable only for debt schemesDebt funds invest in securities with varying maturities. The average maturity of a fund indicates the average maturity of all debt securities in a fund.

Long maturity funds are more sensitive to market movements because the market prices of long-duration securities are more sensitive to movements in interest rates. You should avoid funds with long maturity if interest rates are likely to rise. In a falling interest rate scenario, such schemes can give higher returns

Portfolio Concentration Ratio

This ratio shows where and how much the fund has invested. Normally 30%-40% allocation to top stocks and 30%-60% exposure to top sectors is expected to be good. It is best to choose funds with lower concentration ratio if you have a low risk appetite.

Portfolio Turnover Ratio

This ratio shows how frequently a scheme trades (buys or sells). While it will be low for passively managed funds, it can go up to 500% for actively managed equity schemes. If you are a passive, long-term buy and hold investor, go for low turnover ratio schemes.

Treynor’s Ratio

This ratio indicates the return per unit of market risk taken by the scheme. Higher than the category average Treynor’s ratio indicates that the fund manager was able to generate higher return.

You can combine the inferences from all of the above methods of measuring risks with information such as the fund’s history, past performance and expense ratio to identify the mutual fund schemes best suited for your risk profile and investment objectives.

Sortino Ratio

Sortino Ratio is one step ahead of Sharpe Ratio. Sortino Ratio is the excess return of a portfolio above the risk-free rate relative to its downside deviation. It considers the amount of inherently bad risk, or downside deviation. In financial terms, it helps to determine an investment’s risk-adjusted returns as it relates to downside risk.

When applying the ratio to an investment, a higher number is better. That high number signifies the amount of return per unit of bad risk. So, a higher number represents a higher return as it relates to that investment’s risk. This can help investors. Generally speaking, a rational investor wants compensation in the form of higher returns when taking on extra risk. This ratio may help an investor find investments with a higher return per unit of downside risk.

While managers often like to highlight their absolute returns, whether over other funds in the category or the market as a whole, as an investor it is incredibly important to also take into consideration the amount of risk that was undertaken to achieve these returns and to make sure that you are compensated appropriately for taking on this risk. Sharpe and Sortino ratio are two statistics that allow us to effectively do just that.

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