Mutual Fund Ratios! Get to Know All About Them Now
Does mutual fund returns sound complicated to you? Can’t you compute the exact values of your funds? If yes, then here are the best solutions for you. We have simplified all the ratios which are being used in the calculations of mutual fund investments just to help you in understanding where you have your money parked and how the returns are calculated on your invested money.
1. Standard Deviation -
It is defined as the deviation in the values of returns of mutual fund with respect to the mean value. It takes into consideration both upside risk and downside risk as it factors both positive and negative deviation of returns regarding mean. In general, the standard deviation of a fund demonstrates the level of volatility in the returns of the funds. It explains how much the returns of the fund will fall or raise with the falling or rising market.
Example - If the average return value of a fund is 10%, and the standard deviation of the same fund is 20%, then the chances of variation in the returns value of the fund will be either 20% higher or 20% lower. This means either the fund will have 12% returns or 8% returns as per the market moves.
2. Beta -
The beta value of a fund demonstrates the change in the price of a fund in relation to the change in the market indices. It is a measure used to calculate the systematic risk of a fund. If the beta of the scheme is less than 1, it shows that it is less volatile than the market, and if the beta is more than 1, it shows that the fund is more volatile than the market.
For example - If a fund’s beta is 1.2, then it is 20% more volatile than the market, and if the beta is 0.80, then the fund is 20% less volatile than the market.
3. Price to Earning Ratio -
It is the most commonly used ratio, which compares the price of a stock or unit with the earning per share(EPS). In the case of mutual funds, it is the average of the PE of all the stocks that together make the fund's portfolio, in relation to their allocation within the portfolio. When the PE of a portfolio is higher, it signifies that the fund holds mostly the stocks which are quoting a valuation premium, which is the indicator of the growth-oriented plan.
For example - If the PE ratio of a fund is 18.50, it means that the investors are valuing the stock at 18.50 times of its earnings.
4. Price to Book Value Ratio -
This ratio signifies the price of a stock in relation to its book value. It is used to compare a stock's market value to its book value, where Book Value = Assets - Liabilities. A lower P/B ratio signifies that the stock is undervalued, which could also mean that something is fundamentally wrong with the company in whose stocks the fund has investments.
5. Sharpe Ratio -
Sharpe ratio is a measure of the risk-adjusted performance of a fund. It reflects the returns generated by undertaking all possible risks of investing in mutual fund and represent the trade-off between risk and returns. In general, it signifies the return generated by a fund in relation to a unit of the mutual fund. Thus, a higher Sharpe ratio would mean that the fund is generating higher returns than the per unit risk of the fund. It provides an unbiased look into the fund’s performance as it is based only on the quantitative measures.
For example - If a fund has an investment in the technology which is performing well, then all the quantitative measures will give such fund a high mark.
6. R-Squared -
It measures the relation of the fund’s portfolio in comparison with its benchmark. It is measured in the range of 1% to 100%. It does not signify the performance of the fund at all, as a great portfolio may also have a low R-squared. It simply helps in finding the correlation of the portfolio’s returns to that of benchmark’s returns.
- When R-squared is in the range of 70-100%, it shows good correlation between the portfolio's returns and the benchmark's returns.
- When R-squared is between 40-70%, it means it has an average correlation between the portfolio's returns and the benchmark's returns.
- And in the case when R-squared is between 1-40%, it means that there has a low correlation between the portfolio's returns and the benchmark's returns.
So now, you must have understood the various ratios which are repeatedly used when you read about the mutual funds and their returns.
With this, you can evaluate the funds’ performance and analyse them well while making a choice for your portfolio. Moreover, if you need any assistance in this regard to make the best selection of mutual fund investment plan, then you must consult our advisors who have experience in their domain. MySIPonline aims to fulfil your every single investment requirement, and you must stay associated with us to experience the difference.
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