Beta in mutual funds indicates systematic risk, and it measures a fund’s volatility as compared to the benchmark index. Let’s assume a fund scheme’s Beta is 1.1. If the benchmark rises or falls by 1%, then the fund may rise or fall by 1.1%.
Less than 1 Beta signifies low volatility, more than 1 value implies high volatility, while a Beta of 1 indicates the possibility of similar fluctuations.
Standard deviation in mutual funds is a measure of riskiness. A higher SD means indicates a fluctuation in return over or below the mean return. If a fund’s SD is 6% and the mean return is 13%, then it means that the fund can generate 6% more or 6 % less return over the mean return – 19% on the upside and 7% on the downside.
Sharpe ratio measures the extra return the fund has earned in comparison to the return earned by any other risk-free instrument. It simply tells you how much extra return you have earned for risking the fund’s volatility as measured by the SD.
If the ratio is positive, the investors have earned higher returns over the risk-free rate and have benefited by taking extra risk. If it is negative, the investors are worse off and have earned lower returns despite taking higher risks.
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Treynor ratio, like the Sharpe ratio, shows the extra returns above the risk-free rate of return. The only difference is that it considers Beta and not SD. It indicates the extra returns for taking a systematic risk, which cannot be avoided in the market.
A higher Treynor ratio fund means it has given better returns considering its systematic risk.
The Sortino ratio also shows the extra returns above the risk-free rate of return. This ratio considers only the SD of negative returns because upside volatility may not be considered bad for investors.
A high Sortino ratio indicates that the fund is less exposed to downside deviation and has given better risk-adjusted returns.
Mutual fund risk ratios can help you select the best mutual fund according to your investment objective and risk profile. If you want to focus on returns, look at Alpha, the ratio that helps you see if the fund you have selected has outperformed the benchmark. If volatility is your area of concern, then analyse Beta, and if you are looking for stable returns, your focus should be on Standard Deviation. On the other hand, Sharpe, Treynor and Sortino ratios help you gauge excess returns viz-a-vis different types of risks. If all this is a headache for you, just open a Standard Chartered Bank investment account – the ‘Fund Select’ functionality will guide you to the eStandard Chartered top funds that are best suited to your risk profile.
