In this article , we are going to look at few ratios which are very important to check before buying or selecting a mutual fund. I am not going to get into the mathematical concepts or formulae of this ratio’s in the interest of simplicity. All right ! Let’s begin.
First term we are going to look at is Standard deviation.
It is use to represent the riskiness of a mutual fund. It is expressed in annualized figures. So higher the standard deviation, higher volatility of fund, higher volatility results in high risks.
I am using Axis smallcap fund – Direct plan as an example for this case, Tenure is 5years.
Must read: how to find good mutual funds for beginners?(part 1)
Here the standard deviation (SD) of axis smallcap fund is 20.06 & its category SD is 23.94.
Lets invest 100rs in these fund at same time, so your return would be profit or loss by the end of year anywhere in this range.
Your return on 100rs could be 79.94rs(loss) , 120.06(gain). It gives an idea how volatile the fund.
Usually the standard deviation of smallcap or mid fund is larger than large cap funds due to its risk.
Next ratio we are going to see is Sharpe ratio.
This ratio will tell how much return the fund produced compared to its risk. Higher Sharpe ratio is always better, because mutual funds are volatile in nature. So an investor will look for higher returns for the risk undertaken.
If you look at the Sharpe ratio of Axis smallcap fund 0.95 and its category Sharpe ratio is 0.69. Axis smallcap fund is better compared to its category fund because of its higher Sharpe ratio compared to the risk undertaken.
All these parameters will help you to guide before choosing fund to invest. I have used Morningstar India to check risk ratios of a fund. If you have any other views or suggestions , please feel free to comment. Thanks for reading. Happy Investing!
