You must properly evaluate before picking up the right Mutual Fund scheme to invest your hard-earned money. While investors often go by scheme category and top performing schemes in the category, they ignore risk indicators for these schemes. When you are comparing schemes to choose from, don’t miss out comparing their riskiness. While there are many risk indicators like Standard Deviation, Beta and Sharpe Ratio provided in the factsheet of every scheme, product label is the most basic thing to look for. The riskometer in the label shows the risk level of the fund.
Standard Deviation measures the range of a fund’s return. A scheme with a higher standard deviation of return indicates its range of performance is wide, implying greater volatility. Beta measures a fund’s volatility with respect to the market.
Beta implies the scheme will be more volatile than the market and Beta<1 means it’ll be less volatile than the market. Beta of 1 indicates the scheme will move in tandem with market volatility.
Sharpe Ratio measure the excess return over risk-free asset a fund provides per unit of risk it assumes. It is a good indicator of risk-adjusted return. Higher Sharpe Ratio is preferable. Next time you research on which scheme to invest in, don’t forget to evaluate them on the above risk parameters.