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Understanding mutual fund performance – how to use ratios and other metrics


July 1, 2021

A couple of weeks ago, we’d explained everything about using mutual fund rolling returns when looking at fund performance. Rolling returns forms the base for several other mutual fund ratios and metrics that are used frequently in understanding a fund’s performance. You know them – we talk about it when we write on funds, you see them in fund details pages. We are, of course, referring to the Sharpe ratio, alpha, beta, standard deviation and the like.

mutual fund ratios

Each metric has a story to tell. But knowing what this story is, is important. Knowing how to look at these metrics together, is important. Knowing which metric to use for which type of fund is important. That’s what we’ll cover here. Do note that this is a more basic article for those not yet well-versed in looking at fund returns. For the more savvy among you, we’ll see you in our next article!

Metric #1 – Standard deviation

Standard deviation gives the extent to which a fund’s returns fluctuate. This fluctuation is both on the upside (gains) and the downside (losses). Measuring standard deviation involves taking a specific return period over a length of time (or rolling returns, in other words) and applying the normal standard deviation formula on these returns. Our mutual fund rolling return calculator will give you a fund’s standard deviation for the rolling period you choose.

A standard deviation number on its own won’t tell you anything – it should be compared with other funds. Quant Active Fund, for example, has a 1-year standard deviation in return over the past 4 years at 34%. DSP Flexi Cap, on the other hand, has a standard deviation of 20%.

What it shows: A high deviation equals high volatility or a greater extent of fluctuations in a fund’s returns. That is to say, the fund’s returns will tend to see frequent rises and dips. As a general rule, lower volatility is preferable as over time, smaller dips and rises help build better returns than big rises and big falls. 

Volatility helps you understand the extent to which returns can swing and what to expect from the fund based on how the market is performing. Highly volatile funds may not suit more conservative investors. 

  • Volatility is a key metric in funds where there is an inherent propensity for returns to fluctuate. This, obviously, will be equity funds. In hybrid funds too, volatility is important; these funds are meant to help cushion your returns from equity-driven return swings and a highly fluctuating fund here is not going to help. 
  • In debt funds, volatility is not that important. Accrual funds are by nature low volatile as bond prices do not see significant fluctuations. This is especially true in very short-term categories such as liquid, ultra-short, low duration, short duration or even credit risk. Duration funds, such as gilt and dynamic bond funds, will see volatility in returns as they depend on bond price rallies to make their returns. In these categories, you can check standard deviation, and stick to shorter return timeframes as explained in the point below.
  • While you look at ‘returns’ with a longer time frame, deviation is best looked at with a short-to-medium-term view as volatility anyway evens out over time. Consider periods such as 6 months (for hybrid categories such as equity savings/balanced advantage) or 12 months, or 24 months if you’re looking at pure equity funds. Don’t go too long-term as volatility evens out over time.
  • Compare volatility between funds of the same category – a large-cap fund will be less volatile than a small-cap one.

Be careful: A high standard deviation does not automatically mean that a fund is unsuitable for you or that it is bad. All standard deviation does is to measure how much returns fluctuate. It does not measure the return itself. A fund can fluctuate a good bit, but still deliver if returns hold above peers or the benchmark. Invesco India Contra, for example, is more volatile than Canara Robeco Flexi Cap, considering 1-year returns rolled over 3 years. But both funds have similar longer-term returns. 

Standard deviation also does not tell you whether the deviation was higher on the upside or downside. Therefore, use this metric to understand volatility, but combine it with metrics explained further down to get the full picture.

Metric #2 – Sharpe ratio

The Sharpe ratio is the return a fund has delivered for a given level of risk. The return here is looked at in the context of a risk-free rate. Typically, this is the yield on government bonds. The risk here is the volatility. Effectively, what Sharpe measures is that, for a given return, how much risk has been taken to arrive at it. When you have two funds with similar returns but where one has lower volatility and the other has higher volatility, you’d obviously go with the first one. As with volatility, the Sharpe ratio involves taking funds’ rolling returns. You can find a fund’s Sharpe in its scheme details page.

What it shows: When you’re investing in a fund, you are taking risk. By measuring excess over the risk-free rate, the Sharpe checks whether this risk is worth taking. But high returns can come with high volatility, as we’ve explained above. Therefore, since Sharpe considers the return deviation, it also checks what risk has been taken to deliver that return. Higher return in a fund does not translate into ‘being good’ if this return does not compensate for its volatility. Sharpe is useful in comparing funds that have delivered on par with each other.

Consider Aditya Birla Sun Life Corporate Bond fund, with an average 1-year return of 9.2% when rolled over 3 years. In the same period, L&T Triple Ace Bond delivered 10%. But the former’s Sharpe is far better at 2.54 against the L&T fund’s 1.46 because it was half as volatile. On the other hand, while UTI Flexicap is higher volatile than, say, DSP Flexicap (based on 1 year returns rolled over 3 years), it still scores better on Sharpe as its returns have been high enough to make up for that higher volatility.

As far as using this metric goes, keep the following points in mind:

  • Sharpe can be used across fund categories in equity, hybrid and debt. 
  • The risk-free rate you take matters. You cannot take very long-term bond coupons as the risk-free rate but consider return timeframes of, say, 1 year for your fund. To skirt such issues, it’s easiest to keep to shorter-term bond rates.
  • The Sharpe that you see can vary based on the rolling returns period and the frequency of rolling considered. 

Be careful: Sharpe is, like with standard deviation, constricted because it doesn’t see whether the deviation comes on the upside or downside. A fund that deviates more on the downside is arguably worse than a fund that deviates more on the upside. The Sortino ratio refines the Sharpe by taking only downside deviation and ignores the upside. Two, in periods of significant equity market correction, the Sharpe ratio for equity and hybrid funds can get very low. If you take return timeframes such as 1 year or shorter to check Sharpe, it can so happen that in corrective phases, the Sharpe can be negative. Should this happen, it’s best to ignore Sharpe as a metric as it can get misleading. Use Sharpe along with both volatility and other metrics explained below.

Metric #3 – Downsides and upsides

As you now know, volatility and Sharpe can hide how a fund performs in different cycles. Splitting up returns into how it performs on the downside and on the upside will show that. There are few ways in which you can see this.

Downside/upside capture: For equity funds and equity-dominant hybrid funds, a great measure is the downside/upside capture ratio. This ratio looks at how much of an index’s loss/gain the fund captures. A fund needs to capture a smaller extent of the downside (so lower downside capture ratio is better) and a bigger share of the upside (higher upside capture is better). 

Axis Bluechip, for example, captures 70% of the Nifty 100’s decline when looking at 1-month dips in the index over the past 4 years. That’s better than BNP Paribas Large Cap’s 80% capture. Or in other words, Axis Bluechip is better able to keep losses contained during market corrections than the BNP fund. Funds that keep downsides controlled have less need for big rallies to recoup that loss.

Generally, you’d want a fund that can contain downsides well. But if a fund that’s poor on the downside has a very strong upside capture ratio, it may still be worth considering for high-risk investors. Why? Because it means that while a fund can fall sharply, in rallying markets it can truly deliver well above the market and make up for lost returns. consider Invesco India Contra that has a downside capture of 98% (based on 1-month losses). On the upside, though, it captures 112% of the Nifty 500’s gains, resulting in better-than-average returns.

To calculate downside/upside capture, take a period when markets have corrected. Take the fund’s returns in the same period and divide the fund return by the index return. Ideally, do this for a few different market phases to get a better picture. The index you choose  here should be one that fits the fund; there’s no point in taking the Nifty 50 index, for example, and seeing what small-cap funds are doing when that index falls or rises.

Loss instances: But calculating downside capture can be hard. In debt funds, the index is irrelevant. Here, the proportion of loss instances is a great metric to use. This metric measures how many times in a given period a fund delivered losses for a particular return timeframe. In debt funds (and even arbitrage funds), this metric is a useful risk measure because one, benchmarks don’t matter in debt funds rendering the downside capture ineffective. Two, funds see losses based on the maturity and/or credit risk in their portfolio. Three, other metrics such as volatility may again have limited use as returns don’t fluctuate much. 

For example, ICICI Pru Savings Fund’s average 1-year return over the past 4 years has been 8.05%, better than ABSL Money Manager’s 7.8%. But the ICICI fund saw 1-week returns slip into losses 7% of the time against the ABSL fund’s 1.3%. 

You can change the return timeframe you’re seeing based on the fund – for very short-duration funds, for example, you can take 1-week returns. For longer-maturity funds, you can take periods such as 6 months or 1 year. You can find this metric both in our scheme details page (where we take 1-year return rolled over 3 years) and in the fund rolling return calculator (where the loss instances are calculated on the rolling period you choose).

Minimum/maximum returns: This is another proxy measure for the risk-return balance. Looking at a fund’s worst performance in a period and its best performance will tell you how badly it can do, and if its returns make up for this performance. again, this metric can be very useful in low-risk hybrid fund categories and debt funds. 
Like with every other metric, using rolling returns of different timeframes will give the best picture. You can find this information both in our rolling returns calculator and in a fund’s scheme details page. Comparing the maximum and minimum returns between funds will help you draw a picture of which fund is better-suited for you. Funds where the minimum return is very poor, even if maximum return is strong may not fit risk-averse investors.

Metric #4 – Proportion of outperformance

This is one of our favourites! Proportion of outperformance measures how often a fund beats its index and its category. The higher the proportion, the better its consistency and ability to stay ahead. You will get this number in our category-wise rolling returns comparison tool.

What it shows: Looking at current 1-year or 3-year or any other return is simply point in time (we have written in detail about mutual fund returns and on why point-to-point returns are misleading). A top-of-the-chart fund today can be much lower down later. Proportion of outperformance does away with point-in-time returns and looks at returns over different return timeframes and periods of time. Because you invest in a fund at various times, you want one that’s always (or nearly always) ahead of its benchmark and ahead of its category.

Consider ICICI Pru Midcap, whose 1-year return is about 86% right now, way above many mid-cap funds and 2 percentage points above the Nifty Midcap 150. But looking at this fund’s 1-year return over the past 3 years has it beating the mid-cap index just 62% of the time when the average for the mid-cap category is higher. But funds with a higher outperformance instances, such as Kotak Emerging Equity or Invesco Midcap at 86-88% are preferable.

It’s not just the benchmark that’s important, but the category as well. A fund that’s able to keep ahead of peers is also a quality one. This is important in debt funds, where benchmarks are not useful. Kotak Dynamic Bond, for example, beats its peer average virtually all the time. You can get the category outperformance in our category-wise mutual fund rolling return calculator.


Be careful: When taking the benchmark, consider the right one. Also take the relevant rolling return period to check for outperformance; an equity fund, for example, may show poor outperformance in short-term periods but be at the top of its game in longer-term periods.

Metric #5 – Alpha and beta

A fund’s beta is its volatility relative to its benchmark. A beta of more than 1 means that the fund can gain more on uptrends and fall more in corrections. A beta below 1 indicates the reverse. Alpha measures the excess returns a fund generates given its beta and what the market delivers. A fund is taking active calls in order to beat the benchmark, which is captured by its beta. Alpha measures how much over the market the fund is able to deliver, given this beta.

What it shows: Beta simply tells you if your fund is going to be one that you can count on to deliver really well on the upside and thereby push your returns up. High-beta funds that don’t do well during market upswings indicate that there’s something amiss in the fund’s strategy. High-beta funds are also better suited for more risk-taking investors. Alpha tells you whether the calls the fund is taking is paying off. The higher a fund’s alpha, the better it is.


Be careful: In both alpha and beta, the actual benchmark matters. For a fund that’s wildly deviant from its benchmark, both measures will not hold meaning as the fund’s performance is not related to the benchmark at all. These measures are also not of much use in debt funds or hybrid funds where benchmarks are either unrealistic or not actually aligned much with fund portfolios.

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Subscription Access & Renewal: Subscription to the Website commences immediately on the realisation of payment of the Subscription Fees. Subscriptions are set to be renewed automatically at the end of the subscription period.

Unless the client notifies us before the end of his/her subscription period, or the client cancels the auto-renewal mandate within the period specified by law, that the client does not wish to renew his/her subscription, the client’s subscription will renew for the period defined by the client’s subscription plan. We will charge the subscription using the same payment method that you previously used.

Although the client may notify to us his/her intention to his/her subscription, such notice will only take effect at the end of his/her then current subscription period, and he/she will not receive a refund other than as set out under Clause 8 in these Terms.

The client may notify us of his/her wish to cancel his/her subscription by sending an email to [email protected]. The client must provide at least 5 business days advance notice for this to be implemented.

Refunds: There can be no cancellation and refund of subscription fee paid once the subscription is active, other than as stated in Clause 8 of these Terms. If the client is entitled to a refund as specified under Clause 8 of these Terms, the RA will credit that refund to the card or other payment method used by the client to submit payment, unless it has expired - in which case the RA will contact the client to proceed with the refund. If we do issue a refund or credit due to circumstances outside the obligations specified under Clause 8, we are under no obligation to issue the same or a similar refund in the future.

General disclaimers: The recommendations made herein in the Research Services are expression of views and/or opinions and should not be deemed or construed to be advice for the purpose of purchase or sale of any security, nor a solicitation or offering on any investment/ trading opportunity on behalf of the company, AMC, insurance company, or issuer of security referred to herein.

The content and research reports generated by the RA does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities.

The information/ opinion/ views mentioned in research reports or by the RA are not meant to serve as a professional guide to the client or recipients of this Report. The research report, recommendation, or any other content published by the RA do not assure or guarantee any minimum or fixed returns to the client or recipients of the reports/ recommendations/ content.

Use of this information is at the client’s own risk. The client must make his/ her own investment decisions based on his/her specific investment objective and financial position and using such independent advisors as he/she believes necessary. The services rendered by the RA are on a best-effort basis. All information in the content or research report of the RA is provided on an as is basis. Information is believed to be reliable but the RA does not warrant its completeness or accuracy and expressly disclaim all warranties and conditions of any kind, whether express or implied.

While due care has been taken to ensure that the disclosures, information, and opinions given are fair and reasonable, PrimeInvestor Financial Research Pvt Ltd and/or none of its officers, directors, partners, employees, agents, subsidiaries, affiliates or business associates shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way whatsoever from the information/ opinions/ views contained in the research report and recommendations that form part of the Research Service, and/or mails, social media or notifications issued by PrimeInvestor Financial Research Pvt Ltd or any other agency appointed/authorised by PrimeInvestor Financial Research Pvt Ltd. Returns and performance figures mentioned in the research report represent past performance and should not be constituted to be future returns or guaranteed returns.

Any agreements, transactions or other arrangements made between the client and any third party named on (or linked to from) the Website are at your own responsibility and entered into at your own risk. Any information that you receive via the Website, whether or not it is classified as “real time”, may have stopped being current by the time it reaches you. Market price information may be rounded up/down and therefore may not be entirely accurate.

The purpose of these disclosures is to provide essential information about the Research Services in a manner to assist and enable the prospective client/client in making an informed decision for engaging in Research Services before onboarding.

History, present business and background: PrimeInvestor Financial Research Private Limited is registered with SEBI as Research Analyst with registration no. INH200008653. The Research Analyst got its registration on August 19, 2021 and is engaged in offering research and recommendation services.

Disciplinary history: There are no pending material litigations or legal proceedings against the Research Analyst. As on date, no penalties / directions have been issued by SEBI under the SEBI Act or Regulations made thereunder against the Research Analyst relating to Research Analyst services.

Details of the RA's associates: No associates.

Usage of Website Content: This Website is controlled and operated by the RA. All material, including research reports, recommendations, portfolios, ratings, lists of financial products, illustrations, statements, opinions, views, photographs, products, images, artwork, designs, text, graphics, logos, button icons, images, audio and video clips and software (collectively, “Content”) are protected by copyrights, trademarks and other intellectual property rights that are owned and controlled by the RA or by other parties that have licensed their material to us.

Except where otherwise agreed in writing with the RA, material on the Website is solely for the client’s personal, non-commercial use. Except as provided below, the client must not copy, reproduce, republish, upload, post, transmit or distribute such material in any way, including by e-mail or other electronic means and whether directly or indirectly and the client must not assist any other person to do so.

Without the prior written consent of the RA, modification of the materials, use of the materials on any other web site or networked computer environment or use of the materials for any purpose other than personal, non-commercial use is a violation of the copyrights, trademarks and other proprietary rights, and is prohibited. Any use for which the client receives any remuneration, whether in money or otherwise, is a commercial use for the purposes of these Terms.

The client may occasionally distribute a copy of a research report, or a portion of the same, from the Website in non-electronic form to a few individuals without charge, provided the client includes all copyright and other proprietary rights notices in the same form in which the notices appear, original source attribution, and the phrase “Used with permission from PrimeInvestor Financial Research Pvt. Ltd.”

While the client may occasionally download and store research reports or information from the Website for his/her personal use, he/she may not otherwise provide others with access to the same. The foregoing does not apply to any sharing functionality we provide through the Website that expressly allows the client to share Content or links to Content with others. In addition, the client may not use Content he/she has downloaded for personal use to develop or operate an automated trading system or for data or text mining.

The client agrees not to rearrange or modify the Content available through the Website. The client agrees not to display, post, frame, or scrape the Content for use on another website, app, blog, product or service, except as otherwise expressly permitted by these Terms. You agree not to create any derivative work based on or containing the research products and Content. The framing or scraping of or in-line linking to the Services or any Content contained thereon and/or the use of webcrawler, spidering or other automated means to access, copy, index, process and/or store any Content made available on or through the Services other than as expressly authorized by us is prohibited.

The client further agrees to abide by exclusionary protocols (e.g., Robots.txt, Automated Content Access Protocol (ACAP), etc.) that may be used in connection with the Research Services. The client may not access parts of the Research Services to which he/she is not authorized, or attempt to circumvent any restrictions imposed on your use or access of the Services.

As a general rule, the client may not use the Content, including without limitation, any Content made available through one of our RSS Feeds, in any commercial product or service, without our express written consent.

The client may not create apps, extensions, or other products and services that use our Content without our permission. The client may not aggregate or otherwise use our Content in a manner that could reasonably serve as a substitute for a subscription to the Website.

The client may not access or view the Services with the use of any scripts, extensions, or programs that alter the way the Services are displayed, rendered, or transmitted to you without our written consent.

The client agrees not to use the Services for any unlawful purpose. We reserve the right to terminate or restrict the client's access to the Website if, in our opinion, the client's use of the Services may violate any laws, regulations or rulings, infringe upon another person's rights or violate these Terms.

Prohibited content: The Website includes comments sections, blogs and other interactive features that allow interaction among clients and between clients and the RA. We call the information posted by or contributed by users “Contributed Content.” In the course of availing of the Research Services or uploading any post or comment on the Website, the client shall not post any Contributed Content that (i) contains nude, semi-nude, sexually suggestive photos, (ii) tends or is likely to abuse, harass, threaten, impersonate or intimidate other users of the Website and/or Research Services, (iii) is lascivious or appeals to the prurient interest or if its effect is such as to tend to deprave and corrupt persons who are likely to use or have access to the Website and/or Services, or (iv) otherwise violates, is prohibited or restricted by applicable law, rule or regulation, is offensive or illegal or violates the rights of, harms or threatens the safety of other users of the Website and/or Services (collectively “Prohibited Content”).

We reserve the right to cease to provide the client with the Research Services or access to the Website, or terminate your subscription, with immediate effect and without notice and liability, for violating these Terms, applicable law, rules or regulations and reserves the right to remove Prohibited Content which is in violation of these Terms, or is otherwise abusive, illegal or disruptive. The determination of whether any content constitutes Prohibited Content, violates these Terms, or is otherwise abusive illegal or disruptive, is subject to the sole determination of the Firm.

Changes to Research Services: We are constantly endeavouring to improve the quality of Research Services provided to our clients. Due to this, the form and nature of the Research Services provided may change from time to time without any prior notice to the client. We reserve the right to introduce and initiate new features, functionalities, components to the Website and/or Research Services and/or change, alter, modify, or discontinue existing ones without any prior notice to the client.

Warranty and liability disclaimer: The Website, Research Services, and all the materials and services, included on or otherwise made available to the client through this Website is provided by the RA on an “as is” and “as available” basis without any representation or warranties, express or implied except otherwise specified in writing. Without prejudice to the foregoing paragraph, the RA does not warrant that:

  • This Website and/or Research Services will be constantly available, or available at all;
  • The information on this Website or provided through the Research Services is complete, true, accurate or not misleading; or
  • The quality of any products, services, information, or other material that you obtain through the Website or Services will meet your expectations.

The RA, to the fullest extent permitted by law, disclaims all warranties, whether express or implied, including the warranty of merchantability, fitness for particular purpose and non-infringement. The RA makes no warranties about the accuracy, reliability, completeness, or timeliness of the Website, Research Services, Content, Contributed Content, Services, software, text, graphics and links.

The RA does not warrant that this Website, Research Services, information, content, materials, or any other material included on or otherwise made available to you through this Website, their servers, or electronic communication sent by the RA are free of viruses or other harmful components.

Nothing on this Website constitutes, or is meant to constitute, advice of any kind.

Indemnification: The client:

  1. Represents, warrants and covenants that no materials of any kind provided by him/her will:
    1. Violate, plagiarise, or infringe upon the rights of any third party, including copyright, trademark, privacy or other personal or proprietary rights; or
    2. Contain libellous, Prohibited Content or other unlawful material;
  2. Hereby agree to indemnify, defend and hold harmless the RA and all of the RA’s officers, directors, owners, agents, customers/clients, information providers, affiliates, licensors and licensees (collectively, the “Indemnified Parties”) from and against any and all liability and costs, including, without limitation, reasonable advocate’s fees, incurred by the Indemnified Parties in connection with any claim arising out of any breach by the client of these Terms or the foregoing representations, warranties and covenants. The client shall cooperate as fully as reasonably required in the defence of any such claim. The RA reserves the right, at its own expense, to assume the exclusive defence and control of any matter subject to indemnification by the client.

Applicable law: This Website, including the Content and Contributed Content and information contained herein, and the provision of Research Services shall be governed by the Securities and Exchange Board of India, laws of the Republic of India and the courts of Chennai, India which shall retain exclusive jurisdiction to entertain any proceedings in relation to any disputes arising out of the same. As such, the laws of India shall govern any transaction completed using this Website.

Information gathered and tracked: Information submitted or collected on the Website or pursuant to the use of the Services is stored in a database. Specifically, we store the username, name, e-mail address, contact number, as submitted or collected on our Website or through the provision of the Research Services. We may use such information to send out occasional promotional materials, including alerts on new Services available, or other promotional and marketing material relating to our clients and customers.

In accordance with the Information Technology Act 2000, the name and the details of the Grievance Officer at PrimeInvestor is provided below:

Mr. Srikanth Meenakshi
PrimeInvestor Financial Research Pvt. Ltd., Registered office: 659, 4th Avenue, D-Sector, Anna Nagar Western Extension, Chennai 600 101.
Email: [email protected]

11. Mandatory notice:

Clients shall be requested to go through Do’s and Don’ts while dealing with RA as specified in SEBI master circular no. SEBI/HO/MIRSD-POD-1/P/CIR/2024/49 dated May 21, 2024 or as may be specified by SEBI from time to time.

12. Optional Centralised Fee Collection Mechanism:

SEBI has operationalized a centralized fee collection mechanism for IA and RA. Under this mechanism, clients shall pay fees to IAs/RAs through a designated platform/portal administered by a recognized Administration and Supervision body. This is an optional mechanism for the registered entities. At this time, PrimeInvestor has opted out of this fee collection mechanism. Therefore, all subscription payments for the Research Services will be through the modes as specified in Clause 5 of these Terms.

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