INSUBCONTINENT EXCLUSIVE:
profitable or unprofitable
But does return of a scheme provide certain nuances which can capture the advantages or disadvantages of being invested with a scheme Can
one consider a variable which, to a considerable degree, captures certain nuances associated with understanding returns One such variable is
alpha.
What is alphaIn mutual funds, alpha is a crucial barometer
Typically, a scheme has an index against which its composition is benchmarked
For instance, a large-cap scheme could have a benchmark index as BSE 100
One, in which the scheme delivers 15% and its benchmark BSE 100 delivers 10% returns in one year
In the second case, the same scheme delivers 10% and its benchmark index BSE 100 delivers 15%
In the first case, the scheme has delivered 5% higher returns than the benchmark
This excess return is the alpha the scheme has been able to generate
There could be a possibility that the markets are in a bearish phase and spotting investible and profitable ideas has become difficult
There could also be a possibility that the fund manager has failed in capturing interesting ideas which would have boosted the returns
So, alpha means the excess returns a scheme generates over and above the returns its benchmark index has generated.
Understanding the
nuances of alpha and betaIn understanding returns an important factor investors need to bear in mind is the concept of volatility
This could be understood in terms of a scheme
One aspect of volatility is associated with the scheme
And the other aspect of volatility is associated with respect to the markets, which is its benchmark index
This aspect of volatility is called Beta
One of the effective ways of understanding how a scheme fares holistically is taking into account both alpha and beta
If a scheme scores well on both these variables, then it becomes an attractive investment option.
In case alpha is not generated, then
whatGenerating alpha has been the key challenge
In the past two years, a line of thought which is gaining currency among high networth individuals is attractiveness of passive funds in
comparison with active funds
This is because a large number of equity schemes have been unable to generate alpha
This is one of the key reasons why HNIs are preferring to invest in exchange traded funds (ETFs) to actively managed funds
In a cyclical phase of markets, such tactical shift happens
But when alpha is generated, an important aspect investors need to bear in mind is the category performance of the scheme
For instance, if a large-cap scheme does not generate alpha then it is important to look at the average return of all schemes in largecap
If the scheme you have invested generates higher return than the average return then it has served well as a profitable investment.