Mutual funds are fast becoming one of the most preferred investment avenues in the country. Today, the investor is spoilt for choice and is confused where to put in his hard earned money. Which of these funds are ?safe? but still can give the best of returns.
Risk associated with a fund, is defined based on fluctuations of returns. The higher the fluctuations in the returns, in a given period, higher the risks associated with the fund.
By using the risk-return relationship, we try to assess the competitive strength of the mutual funds vis-?-vis one another in a better way. Here are a few measures of risks and how these can help you choose the fund that suits you best.
Measures of Risk
Beta
This represents fluctuations in the NAV of the fund vis-?-vis market. This is the relationship between the volatility in the fund's returns and the market benchmark. The value of Beta for the benchmark is 1. A fund with a Beta greater than 1 is more volatile, and a fund with a Beta less than 1 is less volatile.
Sharpe Ratio
This ratio measures the amount of excess return for each unit of risk taken by the fund. It is measured as the difference in return generated by the fund and the return generated by the risk-free rate of interest. A negative excess return means the fund is generating less return than the risk-free rate. Sharpe ratio should always be used as a measure of comparison between similar funds.
Treynor Ratio
This is another comparison ratio, which measures the excess returns a fund generates for each unit of market risk taken. Again, it should be used to compare funds in the same category, and in any such category a higher Treynor ratio is better than a lower ratio.
Information Ratio
This is a way to see, whether a fund manager, who has taken risks that are greater than the market-risk, has acted upon good ?information?. A higher information ratio indicates that the extra risk is being managed more than adequately to generate extra rewards for the fund.
With these above measures, an investor would be armed well enough in taking a reasonably good decision.
To know more, click here: http://www.sundarambnpparibas.in/pdf2/2008/Sep/performance_measures_of_mutual_funds.pdf
Disclaimer ?Mutual fund investing is subject to market risk. Please read the offer document before investing"
