In previous chapters, we've explored various features of a mutual fund. In this chapter, we'll delve into crucial risk measures such as Beta, Alpha, Standard Deviation, and the Sharpe Ratio.

Beta is a vital attribute, serving as a measure of relative risk against a fund’s benchmark. With a beta of 0.95, the Tata Multicap fund is slightly less risky than the S&P BSE 500 TRI, given the Beta is below 1. If a fund's beta is greater than 1, it implies higher risk compared to the benchmark. Beta is not indicative of the inherent risk, similar to comparing Ferrari's speed to BMW.

Alpha evaluates the excess return of a fund over the benchmark on a risk-adjusted basis. For example, a fund returning 10% against a 7% benchmark with a beta of 0.75 results in an alpha of 3.75%. Increasing beta decreases alpha, penalizing more volatile funds.

Standard Deviation (SD) reveals a fund’s inherent risk. A higher SD denotes higher volatility and risk. For instance, the Axis Small-cap fund with an SD of 23.95% is riskier than Axis Long Term Equity with an SD of 19.33%.

Sharpe Ratio plays a critical role by considering risk, return, and the risk-free rate. It indicates the return per unit of risk, with a higher ratio suggesting better fund performance. It applies more to equity funds rather than debt funds.

In upcoming chapters, we will discuss Sortino’s Ratio, Capture Ratios, and focus on constructing Mutual Fund portfolios.

Key Takeaways:

• Beta measures relative risk compared to a benchmark. Higher beta implies higher risk.
• Alpha indicates risk-adjusted excess returns over the benchmark. Alpha decreases as beta increases.
• Standard Deviation assesses a fund's risk; higher SD indicates increased volatility.
• Sharpe Ratio represents return per unit of risk; a higher ratio is preferable.