Mutual Fund Investment: Do not invest in the greed of high returns, these 5 risk parameters will reveal the whole truth of the fund.

Business Desk – Mutual Fund Investment: Most of the investors investing in mutual funds decide to invest after looking at the returns of a scheme for the last three or five years. But financial experts believe that considering a fund as better only on the basis of returns can be a big mistake.

Many times two funds give almost similar returns, but the level of risk involved in them is completely different. In such a situation, investors should focus not only on returns but also on risk-adjusted performance. Recently, the data of JM Flexi Cap Fund and Parag Parikh Flexi Cap Fund has proved that the fund giving higher returns is not always a better option.

Ahead in returns, but also higher in risk

According to the last three years data, JM Flexi Cap Fund has given an annual return of around 17.96%, while Parag Parikh Flexi Cap Fund has given an annual return of 15.31%. At first glance JM Flexi Cap appears better because it has higher returns.

But when the risk data related to investment is looked at, the picture changes. According to experts, investments should be evaluated not only by the returns but also by the risk taken to achieve that return.

Understand the real risk from Standard Deviation

The amount of fluctuation in returns of a mutual fund is measured by standard deviation. The standard deviation of Parag Parikh Flexi Cap Fund over the last three years was 9.91, while that of JM Flexi Cap Fund was 17.44.

This means that there was a lot of volatility in the returns of JM Flexi Cap Fund. In simple words, investors faced more volatility in this fund, whereas Parag Parikh Flexi Cap Fund remained a relatively stable performer.

Beta Ratio tells how much the fund will move with the market.

Beta shows how quickly the fund reacts to market fluctuations. The beta of JM Flexi Cap Fund is 1.05, which means that this fund can show slightly higher fluctuations than the market in case of market rise or fall. Whereas the beta of Parag Parikh Flexi Cap Fund is only 0.60. This means that the fund may be relatively less affected by market downturns and can help in preserving investors’ capital.

Sharpe Ratio shows real performance

Sharpe Ratio measures the returns compared to the risk of a fund. The higher the sharper ratio, the better it is considered. According to the data, the sharp ratio of Parag Parikh Flexi Cap Fund is 0.93, while the sharp ratio of JM Flexi Cap Fund is 0.72. This shows that Parag Parikh has given better risk-adjusted returns by taking less risk. That means investors got better performance with less volatility.

Parag Parikh also ahead in Sortino Ratio

The Sortino Ratio specifically measures downside risk. It tells how well a fund performed in negative circumstances. The Sortino ratio of Parag Parikh Flexi Cap Fund was 1.26, while that of JM Flexi Cap Fund was recorded at 0.95. This indicates that Parag Parikh Fund provided relatively better protection to investors during market weakness.

What does Alpha Ratio say?

Alpha reflects the actual ability of a fund manager. It tells how much excess return the fund earned compared to its benchmark index. The alpha of Parag Parikh Flexi Cap Fund was 4.38, while the alpha of JM Flexi Cap Fund was recorded at 4.21.

The alpha of both the funds is almost the same. This means that JM Flexi Cap Fund’s excess returns came primarily from higher risk appetite and not from any exceptional fund management strategy.

Be sure to check these risk parameters before investing

Standard Deviation – What is the volatility in returns.
Beta Ratio – How much the fund fluctuates compared to the market.
Sharpe Ratio – Return compared to risk.
Sortino Ratio – Fund performance during downturns.
Alpha Ratio – Actual ability of the fund manager.