How to Rate a Mutual Fund ?Understanding Mutual Funds returns

How to Rate a Mutual Fund ?Understanding Mutual Funds returns

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rate a mutual fund
Rate a Mutual Fund

Check Volatility using Beta Co-efficient

Beta Coefficient is used as a measure to check the relative sensitivity of a mutual fund to the market. The higher value of the beta means that the more volatile the fund. It is then considered to very sensitive relatively to the market as a whole.

BSE sensex is assigned a beta of 1. It has been widely used by many investors and analysts to determine just how volatile a mutual fund is as compared to a standard index. In India the standard of comparison is provided by SENSEX index.

Its usual time frame is three years back. A stock fund that is 20% more volatile than the stocks of that constitute the SENSEX would have a beta value of 1.2. Those stock funds that are 15% less volatile than the SENSEX would have a beta of 0.85.

Beta is not a totally indicative depiction of a stock fund’s situation. If a fund is “thinly traded,” or in other words there are not too many shares outstanding, large price swings are possible whenever shares are sold. In general, beta values are a good & reliable way of determining how a stock fund has done, and in a way, how well it may do in the future. Beta values for many Indian mutual funds can be found in many financial magazines, fianacial websites or special investing periodicals.

Find out the Risk vs. Reward using Alpha

Risk and Reward is direcly proportional. It depends on how much of a risk-taker you are is directly proportional to how much you stand to gain or lose. Risk vs. Reward is a concept that almost all investors struggle with and are aware of.

Alpha is the relationship between a fund’s beta value and its actual performance. Higher alpha values are considered better. Anything above zero is desirable.

Net Asset Value

Net asset value or generally known as NAV of a mutual fund is the price per share/unit. The NAV of a mutual fund is calculated by taking the value of the securities that the fund is managing and dividing that by the number of shares outstanding. For example a mutual fund with net assets of Rs 2.5 crore and 10 lakh shares outstanding has a NAV of Rs 25.

Important points to note on the Prospectus

When you get a prospectus along with the application of a mutual fund, please note the following most important aspects: Date of issuance, minimum investment, objective, record of performance, degree of risk and fees.

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3 COMMENTS

  1. It feels like a very hard task to understand the whole concept of Mutual funds. Even if I had gone through a lot of articles, it still stays like a fog in my brain. This article helped to blow off a part of it, still feels that I have to dig harder to understand the potential benefits & Risks in mutual funds.

  2. Very nice article !!! It has definitely widened my investment knowledge horizon.Also author has gone forward an extra mile for explaining the peculiar terms like beta , alpha.Th author has not stopped just by defining the terms but has also guided the readers with the suggested benchmarks.The investors should definitely read the article for a choosing a best mutual fund.

  3. Mutual funds investment are considered to be the most volatile or risky. It is usually advised to consult a expert before investing in it. But to certain extend the consultant even check on the alpha and beta values plus his experience counts. The article surely gives layman people like us an oppurtunity to somewhat know the basic of this.

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