{"id":36890,"date":"2024-11-15T11:34:42","date_gmt":"2024-11-15T11:34:42","guid":{"rendered":"https:\/\/www.tatacapitalmoneyfy.com\/blog\/?p=36890"},"modified":"2024-11-21T09:48:58","modified_gmt":"2024-11-21T09:48:58","slug":"alpha-beta-in-mutual-fund","status":"publish","type":"post","link":"https:\/\/www.tatacapitalmoneyfy.com\/blog\/mutual-funds\/alpha-beta-in-mutual-fund\/","title":{"rendered":"Alpha and Beta in Mutual Funds & How It Is Calculated"},"content":{"rendered":"\n

<\/p>\n\n\n\n

The only way you can make a sound and informed investment decision is by examining your mutual fund options thoroughly regarding their profitability. While this typically requires you to study the mutual fund\u2019s investment objective, fund manager\u2019s experience, expense ratio, fund history, and the like, you can also support your decision-making with investment instruments such as Alpha and Beta.<\/p>\n\n\n\n

These are tools that allow you to measure a mutual fund\u2019s performance, its relationship to the market, and its response to market changes. Here we discuss everything from what these are to how these are calculated.<\/p>\n\n\n\n

What is Alpha in Mutual Fund?<\/strong><\/h2>\n\n\n\n

Alpha is a parameter that allows you to understand a mutual fund\u2019s performance. It compares a mutual fund against an index, and if its calculated returns are above the index within a specific timeframe, the mutual fund is considered to be a good investment option. In case the value is 0, the mutual fund is believed to earn the same returns as the index. Below 0, it is considered to be an unfavourable investment option due to low returns.<\/p>\n\n\n\n

What is Beta in Mutual Fund?<\/strong><\/h2>\n\n\n\n

Beta is a metric that helps you ascertain the fund\u2019s reaction to market fluctuations. It measures the sensitivity of the mutual fund. In mutual funds, Beta\u2019s baseline is 1. If the mutual fund\u2019s Beta is greater than 1, it’s considered to be more volatile than the benchmark index. If it’s equal to 1, it shares the same variation as the benchmark index. Lastly, if it is less than 1, the mutual fund is less reactive to changes than the benchmark index.<\/p>\n\n\n\n

How are Alpha and Beta in Mutual funds calculated?<\/strong><\/h2>\n\n\n\n

Alpha and beta in mutual funds<\/a> are calculated through the Capital Asset Pricing Model (CAPM) formula. This formula facilitates the accurate calculation of a mutual fund\u2019s risk-adjusted returns. The formula for calculating Beta in mutual funds is:<\/p>\n\n\n\n

[(Mutual fund return- Risk-free rate)] \/ [(Benchmark return \u2013 risk free rate)] = Beta<\/p>\n\n\n\n

The formula for calculating Alpha in mutual funds is:<\/p>\n\n\n\n

[(Mutual fund return = Risk-free return)]- [(Benchmark return- risk free return) x Beta] = Alpha<\/p>\n\n\n\n

Let\u2019s take an example for clarity. For instance, a mutual fund offers 20% returns annually, with the benchmark return being 15%. Assuming the risk-free rate is 10%, Beta would be calculated as:<\/p>\n\n\n\n

[(20-10)] \/ [(15-10)] = 2<\/p>\n\n\n\n

This means that the mutual fund is twice as volatile as the benchmark return. Now, let\u2019s calculate the Alpha, assuming Beta is 1.<\/p>\n\n\n\n

[(20-10)] \u2013 [15-10)] x 1 = 5<\/p>\n\n\n\n

This means that the fund outperforms the benchmark return and will be a good investment option.<\/p>\n\n\n\n

To Sum Up<\/strong><\/h2>\n\n\n\n

Now that you know what is alpha and beta in mutual funds, and what is alpha and beta formula, you\u2019re better positioned to make an investment decision. All that\u2019s left is choosing the right financial partner in your investment journey. For this, consider Tata Capital Moneyfy.<\/p>\n\n\n\n

With Tata Capital Moneyfy, you get a platform that allows you to monitor your portfolio in a single click, invest in a proactive, responsible and safe manner, leverage comparison and scanner tools, and experience a completely hassle-free investment journey.<\/p>\n\n\n\n

To learn more, visit the Tata Capital Moneyfy website<\/a> or download the Tata Capital Moneyfy app<\/a> today!<\/p>\n","protected":false},"excerpt":{"rendered":"

The only way you can make a sound and informed investment decision is by examining your mutual fund options thoroughly regarding their profitability. While this typically requires you to study the mutual fund\u2019s investment objective, fund manager\u2019s experience, expense ratio, fund history, and the like, you can also support your decision-making with investment instruments such […]<\/p>\n","protected":false},"author":1,"featured_media":37127,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[62],"tags":[],"yoast_head":"\nWhat is Alpha and Beta in Mutual Funds - Tata Moneyfy<\/title>\n<meta name=\"description\" content=\"Alpha and beta in mutual fund are two most important factors which defines relationship between risk & return. 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