A beta greater than one indicates higher-than-benchmark volatility and vice-versa.Īt the time of posting this blog, the Franklin India Bluechip Fund and Aditya Birla Sun Life Frontline Equity Fund both operated at a beta of 0.94. This volatility or swing gives you the systematic risk of the security or portfolio when we compare it to the market as a whole. Source: Is it time for you to shift from large-cap to passive mutual funds? Betaīeta measures the relative volatility of a portfolio or mutual fund against its benchmark index. The difference between active and passive mutual funds is falling with the alpha being as low as 0.5% (down from 6.5%). As a consequence, more and more investors are switching to low-cost, passively managed Index funds with the rationale being, “if you can’t beat them, join them”.
In the Indian context too, we have seen evidence of that with the 3 year performance of both mutual funds. This number goes further up when you add other expenses like taxes and fees. While alpha is highly desirable in one’s portfolio, many benchmarks manage to beat actively managed funds like Franklin India Bluechip Fund (AUM of ₹7,500 crores) and Aditya Birla Sun Life Frontline Equity Fund (AUM of ₹20,000 crores).Įvidence shows that in the United States, 83% of active funds have been unable to deliver a positive alpha over a 10 year period. As a result, the alpha for this large cap fund make a very different reading.ģ year alpha = -3.11 (Fund : 14.59%, Benchmark : 17.70%)ĥ year alpha = 2.26 (Fund : 15.65%, Benchmark : 13.39%) Case in point is the Aditya Birla Sun Life Frontline Equity Fund, also a large cap fund, which uses NIFTY 50 TRI as its benchmark. So, on a 3-year evaluation, the alpha for the Franklin India Bluechip fund is -4.65.įund managers and hedge fund managers love to talk about their alpha indicating that they are good enough to outperform the market and deliver above-average returns to their clients.Īs an investor, it’s important for you to check what benchmark are the fund managers using. However over a 3-year period, Franklin India Bluechip Fund and the NIFTY 100 TRI have delivered 12.76% and 17.41% respectively. Over a 5-year period, Franklin India Bluechip Fund has delivered a CAGR of 13.92% while the benchmark has delivered 13.54%, which translates to an alpha of 0.38. Franklin India Bluechip Fund uses NIFTY 100 TRI as its benchmark. In other words, the portfolio manager has not added or lost any value when compared to the broad market.Īlpha is quite a significant number when evaluating mutual fund risk. Likewise, a negative alpha indicates the underperformance of an investment.Īn alpha of zero would indicate that your investment portfolio or mutual fund is moving perfectly with the benchmark index. A positive alpha of one means the portfolio has outperformed the benchmark by 1 percent. The alpha is the difference between the returns of your portfolio and the returns of the benchmark – which means the alpha can be positive or negative. Lower volatility may not mean lower riskĪlpha (also called the “ holy grail of investing”) measures the performance of an investment portfolio against its benchmark index.
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