Mutual Fund Alpha and Beta are a measure of its risk profile. they are amongst many other variables which help in making investment decisions.Beta denotes the risk due to volatility and Alpha is the returns generated as per beta of the fund.
Beta Of Mutual Fund
Beta is a statistical tool which tells about the relative volatility of a Mutual Fund as compared to the market and thereby denotes the risk profile of the Mutual Fund. the Beta value for the corresponding market for the Mutual Fund is taken as 1. Any value more than 1 denotes more volatile and a value less than 1 denotes less volatile.For example, if a Mutual Fund has beta 1.2, that means it is more volatile than the market and thereby comparatively riskier.It will be important to mention here that Beta is generally taken for consideration in conjunction with Mutual Fund R-squared.
Alpha Of Mutual Fund.
You would have read at many places or probably heard people talking about how a fund or a fund manager constantly generates higher Alpha. Question is, what is this Alpha and how does it concern a Mutual fund investor. In simple terms it can be said that Alpha of a Mutual Fund is its capability to beat prediction, meaning higher the alpha, higher are the returns, more than the prediction.Let us take an example if a fund was predicted to give returns of 12% taking into account its Beta and market conditions, but it gives returns of 15 % instead, then it is said to have generated an alpha of 3.Alpha measures a Mutual Fund managers ability to generate returns higher than the market.It should be noted that the Alpha is based on Beta, meaning it is a measure of risk-adjusted returns.
Use of Mutual Fund Alpha and Beta for investor
The investor needs to use Mutual Fund Alpha and Beta as per the risk profile while selecting the Mutual Fund.As can be seen from the earlier explanation of Alpha and Beta, low-risk appetite need to look into the Mutual Fund with lower Beta. While everyone wants to have a Mutual Fund with low Beta and High Alpha, but it needs to be seen that it is difficult for a Mutual Fund Manager to generate higher Alpha without corresponding high Beta, meaning higher risks higher returns. while in theory, this seems logical but it may not always be true in the real world of investment where a mutual fund generates high Alpha just because it has high Beta.
investors need to use the values of Alpha and Beta before making the selection of Mutual Fund for investment, not in isolation but in conjunction with other parameters.Hope this article helps you to understand the concepts in simple language.