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# What is Alpha and Beta in Mutual Funds and How to Calculate

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Risk and return on investments go hand in hand. Risk and return are present for all investments. If you do not take risks, you cannot anticipate significant returns. However, the high risk always doesn't indicate high returns. The likelihood of losing your investment is also considerable. You must be able to assess the risks and risk-adjusted returns of potential investments before making a shortlist. Similarly, knowing the risk and returns is important when evaluating a mutual fund.

Alpha and beta help you assess performance and risk in mutual fund schemes. Consequently, they can be important variables in helping you to select options that align with your objectives. Here is everything you need to know about Alpha and Beta.

## What is Alpha in Mutual Funds?

Alpha in mutual funds is the performance of a fund relative to its benchmark. It allows you to determine whether a mutual fund scheme has surpassed its benchmark. Therefore, Alpha is irrelevant for passive funds replicating the benchmark's performance. However, it is an important indicator for active funds, whose objective is to surpass the benchmark.

Let's understand how to determine the performance of mutual funds using Alpha:

• In terms of mutual fund schemes, Alpha's baseline is 0.
• Negative Alpha indicates that the fund has underperformed the benchmark.
• If the fund's Alpha is positive, it has surpassed the benchmark.

### How To Calculate Alpha?

The formula for Alpha in mutual funds is:

(Mutual fund return â€“ risk-free return (RF)) â€“ [(Benchmark return â€“ risk-free return (RF)) x Beta]

### What is Beta in Mutual Funds?

The Beta in Mutual Funds reveals how a fund responds to market volatility. It indicates the stability of the fund and its sensitivity to market movements.

Let's understand how to determine the performance of mutual funds using Beta:

• In terms of mutual fund schemes, Alpha's baseline is 1.
• If Beta equals 1, the fund is subject to the same fluctuations as the benchmark index.
• If the Beta is below 1, the fund's value fluctuates beneath the benchmark index. Hence, this indicates that the fund is more resistant to market volatility.
• If the Beta is greater than 1, the fund is more sensitive to changes in the benchmark index. Hence, this indicates that the fund is susceptible to market volatility.

### How To Calculate Beta in Mutual Funds?

The formula for Beta in mutual funds is:

(Mutual Fund Return â€“ Risk-Free Rate (RfÂ­)) / (Benchmark Return â€“ Risk-Free Rate (RfÂ­))

### Why Are Alpha & Beta Important In Mutual Funds Assessment?

When investing in a fund, the estimation of Alpha and Beta is very important. These factors assist investors in fully understanding the anticipated returns and risks associated with investing in a fund, permitting them to make sensible investment decisions.

The fund's historical returns indicate its past performance and ability to generate returns during various market cycles. However, past performance is not necessarily indicative of future success.

Therefore, complete reliance on them isn't advisable. However, these past earnings are a good measurement of the fund manager's ability to navigate the portfolio and adjust its composition in response to market volatility

In contrast, the beta factor gives insight into the risk of investing in a fund. If the fund's Beta is high, it gives the investor an idea about the high risk and if the investor can take such a risk. Consequently, investors with a low-risk tolerance can choose funds with low Beta, and conversely.

### Conclusion

Whenever you invest in mutual fund schemes next time, checking the Alpha and Beta values is important. It's important to remember that while considering these figures, you should also consider other factors, such as the fund house's reputation, current market conditions, and portfolio allocation. This will give you a complete understanding of the fund you wish to invest in.

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