People invest in mutual funds to earn valuable returns. If you invest in mutual funds, you would know that to get valuable returns, you must make an informed investment decision. You must be aware of the returns history of the fund as well as the risk factor.
But how can you assess the risk involved in the mutual fund you want to invest in? Different ratios can help you with risk assessment. They are also vital when you must pick between various mutual funds. Investments in equity, mutual funds, etc. are assessed against the standard of the market. Alpha, Beta, Standard Deviation, Sharpe Ratio, etc. are the ratios that evaluate the risk and returns of an investment.
Beta indicates the sensitivity of the market for mutual funds with Investors assess the volatility of the market to see how a mutual fund is doing. Beta predicts the fund's price movement as well as its volatility. It evaluates an investment's risk, and it helps an investor to judge a fund's performance based on the risk factor.
But if there is an intermediary, like a mutual fund distributor, broker, 3rd party website, or 3rd party mobile app between you and the fund house, you will invest in the Regular (R) version of the same scheme.
Regular and Direct are two versions of the same scheme. When an intermediary is involved, the fund house pays a commission from the NAV of the scheme. This is the reason why equity schemes have two NAVs- one for Regular and other for Direct schemes. NAV of Regular scheme is lower than that of Direct schemes. In the longer-run, Direct schemes are known to generate higher returns.
A mutual fund's movement compared to the market is indicated by Beta. It denotes how the returns of a fund behave against the market movements. When you invest in a mutual fund, the Beta ratio helps you to see how your fund's returns may fluctuate as per the market's movements. The benchmark index that a fund is reacting to in the market is studied with the Beta ratio.
Beta helps in studying the fund's return over time. It sees the growth potential of the fund and helps an investor to get more returns. The stock prices have an index to predict future returns. The index can go high or low based on the market. A mutual fund also is driven by the market. Beta in mutual fund showcases how a fund can react to the movement of the stock market.
For example, you invest in a mutual fund with a beta of 1.5 and the market sees a growth of 20%. In such a case, you will be getting returns of 25%. But the fund's value may go down 25% if the market sees a fall of 20%.
The market has a beta of 1.0, and the Beta ratio in mutual funds indicates how a fund might move based on the market's movements. A beta higher than 1.0 of a fund indicates that it is more volatile than the market's movements. Meanwhile, a beta below 1.0 denotes that investment is less volatile than the market. Investment is as unpredictable as the market if the Beta is 1.0.
The beta ratio can help you know how high the risk can be when you are investing in a mutual fund . It may help you invest better.