One can easily understand and compare these tools to select the best available fund in the market.
1. Alpha:
Alpha is a performance parameter used to compare mutual fund returns with respect to the benchmark index of market. For example, ''If your fund has generated 13% annual returns, whereas benchmark index of the market has gained only 10% in a particular time; means that your fund has generated an alpha of 3%.
2. Beta
Beta is a performance parameter that measures the risk and volatility level of the fund. If a beta of your fund stands at one (01), it means that it has a similar volatility or risk ratio as compared to a benchmark index suitable to be compared with your fund.
3. Standard Deviation
Standard deviation is applied to the annual rate of return of an investment to measure its volatility (risk). A volatile stock or fund would have a high standard deviation. With mutual funds, the standard deviation tells us how much the return on a fund is deviating from the expected returns based on its historical performance.
4. Sharpe's Ratio
The Sharpe's ratio uses standard deviation to measure a mutual fund's risk-adjusted returns, as it tells you the worth of risk you bear. It tells you how well your mutual fund portfolio has performed in excess of the risk-free return (if you would have invested in government securities instead, which are almost risk-free). This gives you an idea if your returns are due to smart investment decisions or excessive risk. Higher the Sharpe's ratio, better the risk-adjusted return of your mutual fund portfolio.
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