'There Is No Alpha In Mutual Funds' Says Radhika Gupta - What Is It Really In Case Of MFs? Explained

Radhika Gupta, CEO of Edelweiss Mutual Fund shared an advice with regard to Alpha In mutual funds. She said that we heard these narratives and every year the data tells a different story - including this year by the way, alpha in large caps vs mid caps.

“Don't forecast alpha or no alpha, and buy passives if you want, yes, but because they represent a simple solution to investing, not because of narratives”, she posted on X.

In response to a post by Niranjan Avasthi, Senior Vice President of Edelweiss Mutual Fund, stating that active funds have done well in 2024, Gupta made this statement.

Key Metrics in MF Performance: Alpha and Beta

In the financial market, the two most commonly used instruments are alpha and beta. These instruments quantify the performance, response, and interaction of a Mutual Fund in the stock market. Alpha and Beta are crucial tools used to assess mutual fund performance in the stock market. These metrics help investors understand how a fund interacts with market movements and performs relative to its peers.

What is Alpha?

Alpha measures the value a fund manager adds or subtracts compared to the fund's benchmark index. It reflects the active return on investment after accounting for market risks.
Baseline: Alpha’s baseline is 0.

Interpretation:

• An alpha of 0 means the fund matches the benchmark index's performance.
• A negative alpha indicates underperformance.
• A positive alpha shows the fund is outperforming the benchmark.

What is Beta?

Beta quantifies a fund’s response to market volatility. It measures how much a fund's price moves in relation to its benchmark index.

Active Funds: Awasthi Data

In 2024, active funds delivered an average excess return (alpha) of 5.06 per cent over their benchmarks, a significant improvement from -0.76 per cent in 2023. 74 per cent of active funds outperformed benchmarks in 2024, compared to just 43 per cent in 2023. Midcap and Large & Midcap funds delivered the highest alpha, with midcaps making a strong recovery after underperforming in 2023.

These metrics provide a clearer picture of mutual fund performance, aiding investors in making informed decisions.