Investors often seek mutual funds that offer the best risk-adjusted returns. While past performance is a key indicator, assessing a fund based on risk (Beta) and excess returns (Alpha) can provide deeper insights. A mutual fund with low Beta and high Alpha can indicate better stability and superior risk-adjusted returns. In this article, we will explore 20 equity mutual funds that have low Beta and high Alpha, making them attractive options for investors.
What is Beta in Mutual Funds?
Beta is a measure of a mutual fund’s volatility in relation to the broader market (typically represented by an index like Nifty 50 or Sensex). A Beta of 1 indicates that the fund moves in sync with the market. A Beta below 1 suggests lower volatility, meaning the fund experiences smaller fluctuations compared to the market. Conversely, a Beta above 1 means the fund is more volatile than the market.
For instance, a fund with a Beta of 0.80 is expected to move only 80% in response to market movements. This makes low Beta funds a preferred choice for conservative investors who want stability in their portfolio. Check 10 Mutual Funds that fell least in the last 6 months during this stock market fall.
What is Alpha in Mutual Funds?
Alpha measures a fund’s ability to generate excess returns over its benchmark. It reflects the fund manager’s ability to outperform the market after adjusting for risk. A positive Alpha indicates that the fund has provided higher returns than expected based on its Beta, whereas a negative Alpha suggests underperformance.
For example, if a mutual fund has an Alpha of 6.0, it means the fund has outperformed its benchmark by 6% on a risk-adjusted basis. High Alpha funds are attractive for aggressive investors seeking superior returns.
How Beta and Alpha Help in Assessing Mutual Fund Risk and Rewards?
Understanding Beta and Alpha together helps investors evaluate mutual fund performance more effectively:
- Low Beta, High Alpha: Ideal for risk-averse investors who want stability but also expect superior returns.
- High Beta, High Alpha: Suitable for aggressive investors willing to take higher risks for higher returns. These are generally seen in midcap and some of the Top Performing Small Cap Mutual Funds.
- Low Beta, Low Alpha: Indicates a stable but average-performing fund. As an example, Value Research Online indicates that SBI Smallcap fund has low beta and alpha (0.72 and alpha of 0.94 respectively).
- High Beta, Low Alpha: Risky and underperforming funds should generally be avoided. As an example, as per Value Research Online, Samco Flexicap Fund has beta of 1.07 and alpha of -13.96
Top 20 Equity Mutual Funds with Low Beta and High Alpha
Below is a list of 20 equity mutual funds that have exhibited low Beta (less volatility) and high Alpha (superior risk-adjusted returns):
| Funds | Beta | Alpha |
|---|---|---|
| HDFC Focused 30 Fund | 0.76 | 10.91 |
| HDFC Flexi Cap Fund | 0.83 | 9.11 |
| HDFC ELSS Tax Saver Fund | 0.83 | 8.33 |
| ICICI Prudential Large & Mid Cap Fund | 0.85 | 7.88 |
| ICICI Prudential Value Discovery Fund | 0.81 | 7.41 |
| Parag Parikh Flexi Cap Fund | 0.66 | 6.90 |
| ITI Small Cap Fund | 0.81 | 6.54 |
| Parag Parikh ELSS Tax Saver Fund | 0.65 | 6.45 |
| ICICI Prudential India Equity FOF | 0.83 | 6.25 |
| HDFC Retirement Savings Fund Equity Plan | 0.80 | 6.23 |
| Invesco India Smallcap Fund | 0.80 | 6.19 |
| Tata Small Cap Fund | 0.75 | 5.98 |
| DSP Value Fund | 0.76 | 5.54 |
| Nippon India Small Cap Fund | 0.86 | 5.18 |
| Quantum ELSS Tax Saver Fund | 0.83 | 4.82 |
| Taurus ELSS Tax Saver Fund | 0.77 | 4.74 |
| ICICI Prudential Flexicap Fund | 0.86 | 4.44 |
| Franklin India Smaller Companies Fund | 0.84 | 3.95 |
| HDFC Small Cap Fund | 0.80 | 3.82 |
| ICICI Prudential Passive Strategy Fund (FOF) | 0.83 | 3.04 |
These funds offer the right balance between stability and superior performance, making them suitable for investors who want better risk-adjusted returns.
When Beta or Alpha Could Be Misleading?
While Beta and Alpha are useful indicators, they have some limitations:
- Beta alone doesn’t guarantee stability: A low Beta fund might not always provide the best returns. Some low Beta funds may still underperform due to poor stock selection. As an example, as per Moneycontrol website, PGIM Smallcap Fund has low beta of 0.72 with alpha of -5.84 and has been underperforming compared to benchmark and peers.
- Alpha is past performance-based: A high Alpha in the past doesn’t ensure future outperformance. Fund management strategies and market conditions may change over time. Invest in diversified portfolio of mutual funds to avoid any negative impact of such strategies.
- Sector allocation matters: A fund with low Beta and high Alpha might still be concentrated in a few sectors, increasing risk if those sectors underperform.
Conclusion: Investing in equity mutual funds requires a balance of risk and reward. Funds with low Beta and high Alpha can offer stability while delivering superior returns. However, investors should also consider other factors such as fund manager expertise, portfolio composition, and expense ratios before making an investment decision. A diversified approach combining Beta, Alpha, and fundamental analysis can help investors achieve their financial goals efficiently.
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Going through the MF investments since Dec 24, I noticed that although MF CENTRAL gives detailed calculations about transactions regarding Investments and Redemption it seems unable to present your individual transaction-wise details about Net invested amount, NAV of investment made, total units , accurate date of investment made.
The detailed Capital Gains statement only displays the gains or losses made by you.
Either I may be wrong in getting the required details or there may be other ways ..
Will you guide me please?
A topic that not many have covered. very useful for DIY investors in the present market scenario. Subscribed!!
Nice and very useful analysis.The analysis is more reliable due to unbiased selection of funds charted as typical example.It can be a basic teaching for new comers and layman.Accept my heartfelt thanks.
Thanks for your comment Debi Prasad ji
Very valuable article
Thank you Varadesan
Nice article by Suresh Ji, thank you.
Thank you Sanjeev