What Are Alpha and Beta In Mutual Funds?
When it comes to investing in mutual funds, Alpha and Beta areimportant concepts to understand. Alpha is a measure of a mutual fund's performance in relation to its benchmark index while, while Beta is a measure of a mutual fund's volatility relative to a benchmark index.
Alpha is often described as the "excess return" of a mutual fund, and it is determined by comparing the fund's returns to those of a benchmark index, such as the Nifty 50. For example, if a mutual fund has a return of 12% and the benchmark index has a return of 10%, the fund has an alpha of 2%. A positive alpha indicates that the mutual fund has performed better than the benchmark index, while a negative alpha indicates that the mutual fund has performed worse.
A beta of 1 indicates that a mutual fund's performance is closely tied to the benchmark index. This means that when the benchmark index goes up, the mutual fund is likely to go up by the same amount, and when the benchmark index goes down, the mutual fund is likely to go down by the same amount. A beta greater than 1 indicates that a mutual fund is more volatile than the benchmark index, and a beta less than 1 indicates that a mutual fund is less volatile than the benchmark index.
How can fund manager help achieve alpha?
A fund manager can help achieve alpha for investors by using different strategies to generate returns that are higher than the benchmark index. This can include actively managing the fund's portfolio, choosing stocks that have strong fundamentals, and timing the market correctly. A fund manager can also use derivatives, short selling, and leverage to generate returns that are higher than the benchmark index.
For example, a fund manager can use a bottom-up approach which is a stock-picking strategy where the fund manager analyses the individual companies and their financials to identify undervalued stocks with strong fundamentals. This approach can help to generate returns that are higher than the benchmark index, resulting in a positive alpha.
Another example is a fund manager who uses a top-down approach which is a macroeconomic analysis-based strategy where the fund manager analyses the overall economic conditions, industry trends, and sector analysis to identifywhich stocks are likely to perform well in the future.
How can a fund manager help achieve beta?
A fund manager's primary goal is to achieve a beta that is appropriate for the investor's risk tolerance. This can be done through various means, such as diversifying the portfolio and selecting securities with lower volatility.
One way a fund manager can help achieve beta is through diversifying the portfolio. This involves picking a mix of different stocks for the fund. Diversifying the portfolio can help to minimize the impact of any single asset class on the overall portfolio's performance.
Another way a fund manager can help achieve beta is by selecting stocks with lower volatility. For example, investing in blue-chip stocks can be less volatile than investing in small-cap stocks or bonds issued by small companies.
It's important to note that achieving alpha and beta is not an easy task and it's not guaranteed. A fund manager's skill and experience play a crucial role. It's also important to note that a fund manager with a positive alpha in one year may not be able to achieve the same in the following year and that past performance of a fund does not guarantee future performance.