How to Measure Mutual Fund Risk | Alpha, Beta, SD, Sharpe, R-squared, Sortino | Learn with ETMONEY

From an investor’s perspective risk is defined as the unfortunate possibility of losing some or all of the original investment one makes. The good news is that risk is measurable and it would be one’s interest to use risk statistics when analyzing and selecting mutual funds
In this video, we looked at six risk measures that are generally used in analyzing equity mutual funds and how one can use these measures in your mutual fund selection process
Content:
00:00 Introduction
01:13 BETA
03:36 ALPHA
04:58 R-SQUARED
06:55 STANDARD DEVIATION
09:23 SHARPE RATIO
11:45 SORTINO RATIO
13:39 ETMONEY OPINION
1. BETA
Beta is a commonly used risk measure .. and calculates the relative volatility of a stock or mutual fund’s returns as against its benchmark. the beta merely explains the relative riskiness of an asset and does not give us the inherent risk of the asset itself.
As an investor, you can use this information on the beta to align your mutual fund portfolio according to your risk appetite. For instance, if you are a conservative investor, you might want to focus on low beta portfolios. But remember what we said earlier beta is a relative measure and does not give us the inherent risk of an asset.
2. ALPHA
Alpha quite simply measures how much better a fund has performed as compared to its benchmark index.
For instance, if the Nifty 50 delivered 10% this past year and your fund did 11% .. then the alpha is +1%. And if your fund underperformed and achieved only 8% .. then the alpha is -2%. This means actively managed funds can have positive or negative alpha depending on how well the fund manager runs the fund. In fact, creating positive alpha is the entire essence behind someone investing in an actively managed fund
3. R-SQUARED
The R-Squared aims to measure a fund’s correlation to its benchmark performance. This is done on a scale of 100 which means if the R-Squared is a 100 then it shows that the performance of the mutual fund is perfectly correlated with the performance of the benchmark
This particularly the case when it comes to index funds that have an R-Squared of 99 or 100. On the other end, we typically see actively managed mutual funds which can have a range of R-squared values
4. STANDARD DEVIATION
The standard deviation measures the dispersion of data from its mean and from a mutual fund perspective, it represents the volatility or riskiness of the fund. For instance, let’s say a mutual fund delivers 10% average returns over a period of time. But as expected, this fund has had some good months and also some bad months with returns vacillating between +20% and -15%
This up and down trajectory of returns in the mutual fund NAV is what standard deviation captures and presents as an annualized number
5. SHARPE RATIO
The Sharpe ratio measures risk-adjusted performance .. and is calculated by subtracting the risk-free rate of return from the fund’s returns .. and then dividing the result by the standard deviation. In other words, the Sharpe ratio indicates whether a mutual fund’s returns are due to the wise investment decisions taken by the fund manager ... or was it the result of taking excessive risk
Like many statistical tools, the Sharpe ratio too can lead to some misleading inferences if used in isolation. For example, it’s commonly possible that a fund with low returns and low standard deviation might show a high Sharpe ratio
6. SORTINO RATIO
The Sharpe ratio uses the total volatility in its calculations in the form of standard deviation. This is where the Sortino ratio is different as it only uses only the fund’s downside standard deviation in its calculations
So as a formula, the Sortino ratio is much like the Sharpe Ratio subtracts the risk-free returns from the fund returns but instead of dividing it by the total standard deviation .. it divides the difference with the downside deviation
This ratio is particularly useful for risk-averse or conservative investors and in the real sense, determines the success of a fund in capping its downside volatility. The Sortino ratio is a useful way for all kinds of investors, analysts and portfolio managers to evaluate a fund's return for a given level of bad risk.
ETMONEY OPINION
Thumbrule way of remembering:
A high Alpha, a high Sharpe ratio and a high Sortino indicate better potential performance for a fund
A low Beta and a low standard deviation indicates lower volatility for the fund
A higher R-Squared indicates a better correlation with the benchmark
#ETMONEY #mutualfundrisk #learnwithETMONEY #mutualfunds
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[@dadasahebbende]

Every week I am waiting for such insightful videos on different topics. Is there anyone else here?

[@1Bond007]

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[@paulrash4058]

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[@joaoeduardo8554]

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He’s not like other brokers that will start saying to you that your trade didn’t go well after collecting your money

[@shankarprasad5767]

Shankar Nath's no nonsense demeanor is time-saving and to the point. Love it!

[@ETMONEY]

Thanks!

[@premnathjha8854]

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[@comments94]

This has to be the best video I have came across about the measures of mutual funds

[@aditya.ishan27]

A very good way to approach this. Much more of a probabilistic and statistical approach which anyone can appreciate who wants to know the nitty gritty of things.

[@ETMONEY]

Thank you

[@mukulkukreti]

This channel is so underrated. Cheers to you mate for sharing knowledge and insights.

[@photogdoc]

Direct funds and free learning sessions - ET Money 🙌🏻🙌🏻🙌🏻

[@rishabhdubey374]

I was waiting for this video. I did my research in the meantime but really wanted you guys to do a video on these performance indicators of a mutual fund. Needless to say, excellent video and very nice explanations. Thank you so much!

[@ETMONEY]

Thanks!

[@sachin_2601]

Simply wow. Very well explained in simple terms. Thank you 👌

[@HudMan4U]

Ive learned a lot from your videos over the past week, I love how you cut to the chase. Thank you for the quality videos!

[@ETMONEY]

Thanks

[@rohitagrawal6978]

What a wonderful way of presenting these ratios...thanks a lot 😍❤

[@adityakothari2350]

Hat's off to each one of you in ET money team for bringing out some great content each week👍

[@ETMONEY]

Thanks!

[@shivamgarg1]

Interesting to learn concept of R Squared. Shankar Nath has to be best expert on Mutual Fund in India.

[@bharanivyaspatri2639]

Have viewed several videos to understand MF ratios before arriving at this video. It’s clearly the best.

[@sunnybansal5904]

ET Money content is always to the point and relevant with proper analysis and explanation. Appreciation for the team which is doing an awesome job to educate layman like us. Your content driven me to trust the ET Money app and now I have shifted my entire portfolio and SIP on your platform. Keep posting such great content. And cheers to your support team too as they helped me in setting up the account.

[@sandeeppai86]

Another very informative, to the point content from ETMoney. Cleared my doubts on mutual fund terminologies in a simplistic way. 👍🏼

[@ETMONEY]

Thanks!

[@AshokYadav-bv6oc]

Very useful and informative video which has explained the complex parameters in a simple way. Thanks to ET money team.

[@fundamentalswing]

As usual , very insight full video from Finance experts. Making addicted to engineers to learn economics

[@ETMONEY]

Thanks!

[@amar23]

Great devoted channel for making Intelligent Investors.Thanks Sir for continuous great content.

[@rohitmondal6876]

Such an educational video. Being fond of Maths, it fascinated me to the core. Great work ETMoney

[@ETMONEY]

Glad you enjoyed it!

[@pavankumary4654]

Every video is a gem

[@HiDibakar]

I wish Mr. Shankar was my Professor at College (which was IIT Kharagpur). I would've ended up being a much better Quant Researcher

[@ETMONEY]

:)

[@b1a5l9a2]

Good video, it will be very helpful if you provide an excel with these risk values for various funds

[@KrishnanV9]

Wonderful explanation. Another brilliant video and great reference

[@Sivaramplus]

Could you please make a video on how ET money ranks mutual fund, or if there is already one, please let me know the details. Thanks for all the work you do in spreading financial literacy

[@mugundhans400]

Excellent video, could learn about the various ratios and their applicability in selecting a fund and final summary was amazing

[@ETMONEY]

Glad it was helpful!

[@abhibhatta21]

Thank you so much fo this videos. Please make videos on stock market investments for beginners

[@g10draku26]

Classic explanation of concepts

[@balakrishnashetty3992]

Well explained. He is professional.

[@nomisroscoe]

This is a good explanation.

[@gauravbhatkar14]

Alpha,sharpe,Sortino,Tyeynor - Higher is the better Beta,SD - lower is the better R square equal to 100 ( Copy index ) - Low.R square

[@1Bond007]

Thanks you sir . You are my Guru for many investment concepts

[@ETMONEY]

So nice of you. Thanks for your patronage

[@k.m.parekh4697]

Excellent video...i love the explanations and the definitions of the terms. Good job.

[@ETMONEY]

Thank you

[@aashishsoneji7507]

Hi team, thanks for the video. As a feature i would like to have these performance ratios for my own portfolio as well on ET money Currently these ratios are for the funds.

[@jone7828]

Thank you very much for the valuable info, I do appreciate your effort

[@kmurari68]

excellent video with complex topic made v simple

[@curiosity3435]

Thank you sir

[@funnyvamsi4008]

Thank you!

[@ajitdubey3309]

Very good video हालांकि #SharpeRatio और #SortinoRatio समझना थोड़ा मुश्किल लग रहा है। examples देखने पड़ेंगे, तब शायद क्लियर हो।

[@abhaylashkari3289]

great explanation

[@dennissteyn8864]

Very nice tutorial, precise and crisp.👍👍

[@ETMONEY]

Thanks

[@SKSahoo]

Nice Explanation.. Thanks!

[@asharafwayanad7488]

Nice information and very coherent

[@jatinmehta8651]

Even in the same category, different schemes have S&P or Nifty based benchmark & the portal analysing RR parameters use a different benchmark for the whole category. How valid are such risk reward parameters from the portals? Further, all schemes within a category have different time frames to calculate RR parameters, which make comparisons of schemes based on RR parameters in their factsheets difficult. Please advise.

[@parthomukherjee76]

my question is in the standard deviation part how do you know for 68% of the time one can expect 7-13% return

[@koyand4626]

Sir . Thankyou

[@prakashraghunathan2685]

Thankyou sir.very good video.i think I will beneffitted

[@prashuprasanna]

Thank you so much Sir. I like most of your videos and i have started investing in Mutual funds via ET money. Can you please let me know if ET money provides advisory?

[@ADITYAYADAV-gx3kt]

Great , Excellent Video.

[@atulnagare3529]

Can you please create video for selecting best ETF and factors to be considered

[@raviramasamy1616]

I generally first like button press and watch Video next.. because such a wonderful unbiased features on equiy MF investment... Hat's off to ET money seva to investos at free

[@ETMONEY]

Most welcome. Thanks for your appreciation

[@ajneeshgoyal9564]

Your knowledge is osm

[@user-qu2xy8uw8c]

Appreciate your efforts

[@vinayaks64]

The video is good but where to find these numbers for mutual funds any ideas??

[@sasikumarb6756]

Thanks for sharing this video, I need how to calculate the beta. Can you help me

[@RishabhRishab]

Pls make a video where you calculate all these things on Excel for last 3 years daily returns and then tally them to values shown on website like yours and some others . Because everyone teaches same theory but practical implementation on Excel is different and values dont tally with whats shown on website. Thanks.

[@indradebpal9067]

This is outstanding video lesson.

[@ETMONEY]

Thank you

[@parvejsolkar123]

Shankar sir always rock 🤟

[@anilshenoy5859]

Can you share video on technical analysis on stocks.

[@primetiming5846]

LUV U THNX

[@ShantanuNandy]

Please let us know how to get these data... Greeks R2 etc values

[@phantommenace9047]

Very informative

[@balakrishnabhandare9926]

Dear Sir Nice explanation.Where can get dynamic values of these ratios ? Historical we can get in most of the websites.

[@crisronaldo9238]

@ET Money - Are the value provided by you folks dynamic in nature? If yes, how frequent are they updated? Thanks!

[@yadukrishnan7946]

Really Amazing content, I started watching this channel only a few days before, and found it to be really AMAZING. I have a question regarding the alpha and index funds. In this video, you said that alpha for an index fund will be 0 since it will follow the index. But in IndexFund video, you mentioned that there is chance that the index fund return might be more than the benchmark, thereby having a positive tracking difference. In such case, alpha must be more than 0 right? Or is it generally ignored because the difference is negligible?

[@ETMONEY]

Dear Yadu Krishnan - alpha is a term denoted to explain the difference between an actively managed fund and the benchmark it is tracking. It is generally not a term that is associated with index funds versus the benchmark. So if you hear alpha then think active funds vs benchmark*. And if you hear tracking error, then its index fund versus benchmark. * The word alpha is also used to distinguish the performance between an active fund and an index fund also. Afterall an index fund's performance is very close to its benchmark, plus/minus 0.1/0.2%

[@yadukrishnan7946]

@@ETMONEY Thanks for the reply. Can I ask one more question? After this video, I was trying to compare the sharpe ratio of different MF. Value >1 is mentioned as good, and >2 is very good,

[@ETMONEY]

@@yadukrishnan7946 Yes, higher Sharpe Ratio is better than lower Sharpe Ratio. On using multiple factors to make decisions, please look out for a video we are releasing next week on how the ETMONEY Fund Report Card works. That will also help you understand what combination of factors like Sharpe ratio, standard deviation, information ratio etc. we use in developing our ranking methodology.

[@chinnujacob5968]

Sir, Immensely helpful !

[@ETMONEY]

Thanks

[@atulade8965]

Sir can you compare elss vs index fund

[@onemicron38]

Informative 👍

[@7414.]

If I invest in two different tax saving fund.. will I get tax exemption for individual earning or overall earnings..?

[@ashimishra8746]

How he decided risk free rate as 5% ? And how is that Standard deviation(negative) he changed, is it just a assumed figure, is their any way to find it.

[@lalrishi]

Excellent video great work

[@ETMONEY]

Thank you very much!

[@nishantnandanmishra3007]

what's the ideal standard deviation?

[@bhaskardebnath6401]

Very impressed presentation 👍👍

[@ETMONEY]

Thanks a lot

[@karthiks7811]

your videos are good, I would also suggest you put these in written like in your website. Some one like me would prefer to read rather than listening to a video.

[@ETMONEY]

It's already there. Please access the ETMONEY blog. All videos are transcribed there

[@sonumeena6878]

Best videos

[@shrinathm.g.8183]

Sir, pls explain about how did u get 68% , 3 % std deviation, its not clear please

[@abhijeetjagtap880]

Best information

[@rajavelr6972]

Informative video, Is this Value will be shown in ET money app with respect to funds??? I want to know this value for axis blue chip fund it will help me shift my fund to axis nifty 100 fund... advance thanks for answer

[@DensonGeorge18]

I have seen these values on money control. You can check that out.

[@ManishMandal1995]

Is there a tool where we can check all these ratios for mutual funds and sort them to know the funds that have a higher/lower ratio?

[@ETMONEY]

Better still, use the ETMONEY app where we have processed these ratios and more into a single score. We just released a video titled "Easiest Way to Pick the Right Mutual Funds" detailing the process. Check that out

[@ManishMandal1995]

@@ETMONEY I use your app and I have uploaded my entire portfolio (CAMS statement) to track my mutual funds. However some MFs don't have a report card. In that case, individual ratios will be helpful in gauging the performance of the funds. Is there a workaround?

[@priyajitghoshal2791]

really informative video

[@ETMONEY]

Glad you liked it

[@truptishirude2627]

Good Afternoon sir, My question is from where we can know data of statistocal risk measure of different mutual fund companies ?

[@ETMONEY]

Hi. Pls try valueresearchonline.com

[@GetRichSteadily]

But where can we get these measures of mutual funds ??

[@sandeeip9531]

Dear i try to regester on your website but no success.. seems it only works for App.. Not sure how many would trust app without website with no customer care for million investment.. Few thousand could be OK.. Pl respond..

[@vinuabhilashputhantharayil4]

Good presentation................Thank you

[@ETMONEY]

You are most welcome

[@krishnaniyer2895]

superr ...keep it up

[@22SANTHANAM]

good one

[@ramansharma9633]

Good video

[@sourabsaklecha3141]

Isn't return of a MF projected after removing the TER? If that's the case then why should we bother if R² value is high or not as the expense is already taken care of.

[@aashishsoneji7507]

I second this. This must br clarified else when we see the graph it the mutual fund category has performed better than the benchmark. If TER is not deducted from the nav its possible that the graph will not give correct visualization.

[@abhishekmittal5440]

Hi sir, for index funds nifty is the benchmark, what is the benchmark for non index funds??

[@ETMONEY]

The index is the benchmark for active funds. For example - for small cap funds, the benchmark is the Nifty Small Cap 250 or Nifty Small Cap 100 index. For large cap funds, it is Nifty 50 or Nifty 100.

[@abhishekmittal5440]

@@ETMONEY so how are these different from 'Index funds'. I think its jus that Index funds almost mirror market performance and these funds deviate

[@ETMONEY]

@@abhishekmittal5440 Pls watch our video on Index Funds versus Active Funds for more detailed information. Thx!

[@abhishekmittal5440]

@@ETMONEY thank you very much...this channel and particularly ur videos have put me on oath for retirement planning, I'm 33 right now. good time to start and learn 😀

[@ETMONEY]

@@abhishekmittal5440 Wish you the very best

[@ankurbisht1456]

PPFAS mutual fund has alpha of 13.44 and Beta of 0.72 :O

[@ranjancom2000]

HSBC Managed Solutions India-Conservative having shar ratio is 3 why still MF was not performing good HSBC Managed Solutions India-Conservative - 1.49% 3.00 Parag Parikh Flexi Cap Fund - 8.31% 3.51 HDFC Flexi Cap Fund - 9.11% 2.78 Kotak Flexicap Fund - 9.47% 2.08

[@narendradas9330]

From where I can get these figures?

[@ETMONEY]

Try valueresearchonline.com

[@mysanisa]

Good one but try to give info in hindi as well.

[@jashuagundla4054]

Sir ji re request please. I am how to lern. And study mutual friend s. ।riskfactors tell me sir please

[@chinnasamyjaikumar7596]

If app available in Qatar will be useful.

[@theacid1]

You're calculation for alpha is a bit missleading cause it's missing the risk-adjustment with beta. You should at least mention that this is only true if the beta with the benchmark index is one.

[@pari-techfinance]

Please explain in hindi

[@pubgtricks1638]

At @7:55 how the 68% is derived

[@vinayprasad34]

it comes from normal distribution curve. this means, 68% of the data falls within one standard deviation, 95% percent within two standard deviations, and 99.7% within three standard deviations from the mean

[@purushothamp6885]

I want invest 5000/- every month atleast Fiver which is the best option but I don't no what is mutual funds

[@purushothamp6885]

Five years

[@vinayak9766]

If you working, go for tax saver funds with 2500 each. Mirae asset tax saver and Quant tax saver

[@MrAkhil3]

Where do we get the data to measure all these metrics?

[@eishujindal]

Sir hindi medium please

[@ETMONEY]

Hindi videos aa rahein hain. Patience pls

[@ETMONEY]

हमने हाल ही में एक हिंदी KZbin channel शुरू किया है। कृपया लिंक पर क्लिक करें और हमारे हिंदी चैनल को subscribe करना न भूलें kzbin.info/door/zWtyDo9KmEC1JoAqa1LIEwvideos