More often than not, people look at mutual funds only through the lens of past returns. “This fund gave 20% returns in five years” or “that fund multiplied money four times in ten years” are statements we hear quite often during casual discussions among friends and family.
But the truth is, choosing a fund based solely on returns is not a wise decision, because mutual fund returns only tell you what happened, but not how much risk was taken to get those returns.
That’s why smart investors look at certain other aspects along with returns, which help in clearly understanding the fund’s risk profile.
Let’s discuss five important numbers that people often overlook.
Standard Deviation: How volatile is the fund?
Standard deviation sounds a bit technical, but its meaning is very simple.
It tells you how volatile the fund’s returns have been.
That is, sometimes very high, sometimes very low or relatively stable.
Let’s suppose there are two funds:
Fund A gave 15% return, but there were sharp dips and surges in between.
Fund B gave 14% return, but the journey was quite smooth.
Here, Fund B will have a lower standard deviation.
In the long run, especially for SIP investors, a fund with less volatility provides more peace of mind.
2. Beta: How much will the fund fall if the market falls?
Beta tells you how sensitive your fund is compared to the market.
Beta = 1 (It means the fund has moved with the market)
Beta > 1 (More volatile than the market)
Beta < 1 (Less volatile than the market)
If a fund has a beta of 0.9, it means that when the market falls by 10%, the fund will fall by around 9% on average.
For investors who get more anxious during sharp declines, funds with a lower beta are mentally more reassuring.
3. Sharpe Ratio: How much return did you get for the risk taken?
Let’s say you took a lot of risk and got a good return—that’s not a big deal.
The real question is: how much return did you get for the risk you took?
That’s what the Sharpe Ratio measures.
The higher the Sharpe Ratio, the better.
It shows how intelligently the fund utilised risk.
Two funds might give a 15% return, but the fund with a higher Sharpe Ratio will be considered better.
In simple terms, the Sharpe Ratio tells you whether a fund is “risky but smart” or “risky and reckless.”
4. Sortino Ratio: How did the fund perform during market downturns?
The Sharpe Ratio looks at overall risk, but investors are most afraid of downside risk.
This is where the Sortino Ratio comes in.
It specifically looks at:
How did the fund perform when the market fell?
If a fund has a high Sortino Ratio, it means that:
Losses were limited during downturns
Recovery was relatively better
For long-term investors, especially those with goals like retirement or children’s education, the Sortino Ratio is a crucial number.
5. Alpha: How much extra does the fund generate?
Alpha tells you how much extra return the fund generated compared to its benchmark.
Positive Alpha → The fund manager did a good job
Negative Alpha → The fund lagged behind its benchmark
If a fund has an Alpha of 4, it means it generated an average of 4% more return than its benchmark.
This number shows that the fund isn’t just relying on the market, but is creating value through active management.
So, is it wrong to only look at returns?
Absolutely not. Looking at returns is important because, ultimately, we invest so that our money grows.
But the problem starts when we make decisions based solely on returns and don’t understand the cost at which those returns were achieved.
Often, a mutual fund looks fantastic in the last 2-3 years. The chart appears to be trending upwards, and everyone is talking about it. But when you look a little deeper, you realise that the fund has taken on a lot of risk and it experienced a sharp and significant decline when the market fell.
It also suggests that the volatility has been so high that the average investor cannot handle it.
Now imagine, if you chose such a fund and the market suddenly crashed.
Your portfolio starts showing losses, and you see losses every day—would every investor be able to remain calm? In most cases, the answer is no.
This is where investors panic, stop their SIPs, or exit the fund at a loss.
The result is that the spectacular returns that looked so good on paper don’t actually benefit the investor.
The simple formula for smart investing
Therefore, when choosing a mutual fund, don’t just look at how much return the fund has given, but ask yourself some honest questions.
1. Does this fund match my risk tolerance?
If you get worried even by small dips, then a highly volatile fund is not right for you, no matter how good its returns may look.
2. Can I stay invested for the long term with this kind of volatility?
Remember, the real gains in mutual funds come from staying invested for the long term, not from timing your entry and exit perfectly.
3. Has the fund delivered returns commensurate with the risk taken?
If a fund has given slightly lower returns but with less risk, it might be a better option for you.
If the answer to all three questions is “yes,” then you are on the right track.
Final observation: Mutual fund investing is not just about big numbers or high returns. It’s about patience, discipline, and self-awareness.
Disclaimer: The above content is for informational purposes only. Mutual Fund investments are subject to market risks. Please consult your financial advisor before investing.