How To Read Mutual Fund Performance Scorecard

How To Read Mutual Fund Performance Scorecard? Rank, Quartile, Standard Deviation, Beta, Treynor Ratio, Sharp Ratio, Alfa, Diversification, Risk Adjusted Returns.

Rank: Higher the return, Higher the rank, i.e. scheme with the highest return will have the first rank. If a scheme has higher ranks (Rank 1 or 2) in all the given periods, then that scheme is considered to be a good performing as well as consistent scheme.

Quartile: Performance for the period is differentiated in four quartiles. First quartile represents best performing schemes (top 25% schemes), while last or fourth quartile represents relatively worst performing schemes for the period. If a scheme remains in first or second quartile for all the given periods, then the performance of the scheme is considered as consistent & above average. For further filteration, risk ratio should be considered.

Standard Deviation: Standard Deviation is absolute measure of volatility. It suggests the deviation of returns from its mean.

Beta : It is the measure of the volatility of a security or a portfolio as compared to the market as a whole. Beta signifies the risk or volatility relative to the Benchmark Indices. By definition, benchmark index holds Beta of 1. For example – If a fund’s Beta is 1.2, it simply means that the fund is 1.2 times more volatile than the benchmark index.

Sharpe Ratio : The Sharpe ratio, also known as Reward to Risk Ratio, measures the risk-adjusted performance. It indicates the excess return per unit of risk associated with the excess return. To calculate Sharpe ratio, risk free rate is subtracted from portfolio returns and dividing the result by the standard deviation of the portfolio returns. The higher the Sharpe Ratio, the better the performance. A negative Sharpe indicates that a rational investor would choose risk-less asset over the risky investment under analysis.

Treynor Ratio : The Treynor ratio, also known as the Reward to Volatility ratio, measures returns earned in excess of that which could have been earned on a risk-less investment per each unit of market risk. To calculate Treynor ratio, risk free rate is subtracted from portfolio returns and dividing the result by the Beta of the portfolio returns. Treynor ratio is a risk-adjusted measure of return based on systematic risk. It is similar to the Sharpe ratio, but the Treynor ratio uses beta as the measurement of volatility whereas Sharpe ratio uses Standard Deviation. The higher Treynor Ratio score means better the fund.

Alpha : The excess return of the fund relative to the return of the benchmark index is a fund’s alpha. Alpha is the actual return in excess to what was predicted using the CAPM model. Alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund’s return. The higher Alpha score means better the fund.

Diversification :– A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio. Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Therefore, the benefits of diversification will hold only if the securities in the portfolio are not perfectly correlated (ideally perfectly negatively correlated).

Risk Adjusted Returns – We should know that how much risk is involved in producing an investment’s return. The return generated in excess of risk is known as Risk Adjusted Return and is generally expressed as a number or rating. Risk-adjusted returns are applied to individual securities and investment funds and portfolios. There are five principal risk measures: Alpha, Beta, R-squared,Standard Deviation and the Sharpe ratio. Each risk measure is unique in how it measures risk.

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