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Published 20:20 IST, January 2nd 2025

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

Alpha measures the value a fund manager adds or subtracts compared to the fund's benchmark index.

Reported by: Musharrat Shahin
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'There Is No Alpha In Mutual Funds' Says Radhika Gupta
'There Is No Alpha In Mutual Funds' Says Radhika Gupta | Image: X

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.

Updated 20:20 IST, January 2nd 2025