When you’re investing in mutual funds, it’s not just about picking the one with the highest returns. Mutual funds can vary widely in terms of risk, performance, and consistency. These differences are influenced by several factors like the type of fund, how the market is doing, and the skill of the fund manager. That’s where mutual fund ratios come in handy.
Mutual fund ratios act like report cards for funds. They help you assess performance, volatility, and how well a fund stacks up against others or its benchmark. In this article, we’ll break down what mutual fund ratios are, why they matter, and which ones you should know to make smarter investment decisions. Analysing mutual fund ratios gives you deeper insight into a scheme’s stability, risk, and ability to deliver across market cycles beyond just short-term gains. Explore Mutual Fund Analytics
What are mutual fund ratios?
Mutual fund ratios are simple formulas that give you insights into how a mutual fund behaves. These tools are especially useful when you're trying to compare funds or understand if a scheme matches your risk appetite. Some ratios tell you how much risk a fund carries. Others tell you how stable or volatile the returns are. And some show you if the fund manager is beating the market — or not.
In short, mutual fund ratios give you a clearer picture of what to expect from a fund, whether you're a cautious investor or more comfortable with risk. They help cut through the noise so you can focus on facts and performance data before making a decision. By understanding these ratios, you’re not just following returns—you’re choosing funds based on risk balance, market performance, and your own comfort zone. Compare Mutual Fund Options Now!
Important mutual fund ratios
To really understand how a mutual fund is performing, it’s helpful to look at a combination of these key ratios. Each one tells you something different about the fund's behaviour, from risk levels to returns.
Alpha
Alpha is one of the most talked-about mutual fund ratios — and for good reason. It tells you whether a fund has done better or worse than its benchmark index. Think of it like a performance scorecard. If the alpha is zero, it means the fund performed exactly like its benchmark. A positive alpha means the fund beat the benchmark, while a negative alpha means it fell short.
For example, if a fund returned 12% in a year and its benchmark returned 16%, the fund’s alpha would be –4. That means the fund underperformed by 4%. Want a more refined take? You can use Jensen’s alpha, which adjusts for risk by considering the fund’s beta as well.
Here’s how it’s calculated:
Jensen’s alpha = Fund return – Risk-free rate – Beta × (Market return – Risk-free rate)
This extra layer of calculation helps investors better understand if the fund's performance is truly exceptional or just riding market trends.
Standard deviation (SD)
Standard deviation tells you how much a fund’s returns tend to swing — in simpler words, how volatile it is. If a mutual fund has a high standard deviation, its returns are all over the place. A low SD means the fund’s returns are relatively stable and close to the average.
This ratio is useful if you’re someone who prefers predictable outcomes. If you don’t want sudden ups and downs in your investments, you might want to stick with funds that have lower standard deviations. It’s also a key component in calculating other ratios like the Sharpe ratio.
In essence, SD gives you a sense of how “bumpy” the ride might be with a particular fund.
Beta
Beta is all about how a fund reacts to market movements. It measures a mutual fund’s systematic risk, which means the kind of risk that affects the entire market (like a recession or a boom). A beta of 1 means the fund’s performance tends to mimic the market. A beta above 1 means it’s more volatile than the market, while a beta below 1 means it’s more stable.
Here’s the formula to calculate it:
Beta = (Covariance of the fund’s returns with market returns) ÷ Variance of market returns
Beta helps investors understand whether a fund will swing more or less than the broader market during ups and downs. If you’re conservative, a beta lower than 1 might suit you better. If you’re willing to take more risk for higher returns, a higher beta could work.
Treynor ratio
The Treynor ratio helps you answer a simple question: “Am I being rewarded enough for the risk I’m taking?” This ratio measures the excess return generated by a mutual fund for every unit of market risk (beta) you take on by investing in it.
Here’s the formula:
Treynor Ratio = (Fund returns – Risk-free rate) ÷ Fund’s beta
Let’s say two funds have delivered the same return, but one has a higher beta (more market risk). The fund with the higher Treynor ratio is giving you better risk-adjusted returns, which makes it more efficient from an investor’s perspective. If you’re comparing funds with similar returns but different betas, this ratio becomes your go-to tool.
Sharpe ratio
The Sharpe ratio is like the cousin of the Treynor ratio — but instead of focusing on market risk (beta), it considers total risk, measured by the fund’s standard deviation. This makes the Sharpe ratio especially helpful when evaluating funds with higher volatility.
Here’s how it’s calculated:
Sharpe Ratio = (Fund returns – Risk-free rate) ÷ Fund’s standard deviation
A higher Sharpe ratio indicates that the mutual fund is delivering strong returns relative to the amount of overall risk involved. It’s an excellent way to identify funds that are not only profitable but also stable. If you’re looking to filter out “wild card” funds, this ratio will help you stay grounded.
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Why are mutual fund ratios important?
Mutual fund ratios aren’t just numbers on a fact sheet — they tell a story about a fund’s performance, volatility, and consistency. They help you dig deeper than just looking at past returns. Whether you’re trying to understand how risky a fund is, how stable its returns are, or how well it compares to its peers or benchmarks, these ratios give you data-backed clarity.
More importantly, they help you align your investment choices with your financial goals and risk tolerance. For example, if you’re looking for a stable income-generating fund, you’ll probably look for one with a high Sharpe ratio and low standard deviation. On the other hand, if you want growth and are okay with risk, a fund with a strong alpha might catch your eye.
Conclusion
At first glance, mutual fund ratios might seem technical or intimidating. But once you understand them, they become powerful tools to evaluate funds clearly and objectively. Each ratio gives you a different perspective — from how much risk you're taking to how well a fund is performing compared to others.
Whether you're new to mutual funds or refining your portfolio, using these ratios together offers a more complete picture. Instead of relying solely on returns, you get insights into consistency, volatility, and risk-adjusted performance. This way, you can select mutual fund schemes that truly match your financial goals and comfort with risk.
So next time you're comparing two similar-looking funds, don’t just look at the past returns — take a deeper look at their alpha, beta, Sharpe ratio, and more. These numbers could be the difference between a smart choice and a risky one.
You can then invest in the funds of your choice directly and easily through the Bajaj Finserv Mutual Fund Platform. Here, you can evaluate and compare over 1,000 mutual funds and find the scheme that is the right fit for your portfolio.
