Beta in mutual fund investments is crucial for assessing risk and making informed decisions. What is beta in mutual fund?
Beta is a metric that measures a fund’s volatility compared to the overall market, helping investors determine whether a mutual fund is more or less volatile than a benchmark index.
Whether you’re selecting a mutual fund or analysing your portfolio, beta plays a crucial role in shaping your investment strategy. Many investors struggle with beta calculation in mutual funds, making it difficult to assess the true level of risk. Understanding beta allows investors to align their portfolios with their risk tolerance and financial goals, ensuring a balanced approach to wealth creation while mitigating unnecessary risks.
Beta in mutual fund?
Beta is a measure of a fund’s volatility (High and low movements) relative to the market. A beta of 1 indicates that the fund performed similar with the market. A beta less than 1 suggests lower volatility, meaning the fund fluctuates less than the market, while a beta greater than 1 indicates higher volatility, meaning the fund experiences larger price swings.
For example, DSP Midcap Fund has a beta of 1.15, meaning it is 15% more volatile than the market. If the market rises or falls by 10%, the fund is expected to move by approximately 11.5% in the same direction. Conversely, a fund with a beta of 0.85 would be 15% less volatile, making it a safer option during market downturns.
Aggressive investors seeking higher potential returns may opt for high-beta funds like DSP Midcap Fund, while conservative investors preferring stability might choose low-beta alternatives. Understanding beta in mutual funds helps investors align their investments with their risk tolerance and financial goals.
Beta calculation in mutual fund
The beta calculation in mutual funds is based on statistical regression analysis and is determined using the formula:
Beta = Covariance of fund and market returns/ variation of market returns
For example :
- Covariance of HDFC Mid-Cap Opportunities Fund and NIFTY 150 MidCap TRI returns: 0.015
- Variance of BSE 150 MidCap TRI returns: 0.012
Beta Calculation:
Beta = 0.015/0.012 = 1.25
Interpretation:
- The calculated Beta of 1.25 indicates that HDFC Mid-Cap Opportunities Fund is 25% more volatile than the NIFTY 150 MidCap TRI index.
- If the NIFTY 150 MidCap TRI moves up by 10%, the fund is expected to rise by 12.5%.
- Conversely, if the market drops by 10%, the fund is likely to decline by 12.5%.
How Investors Use Beta:
- Aggressive investors may prefer high-beta funds like HDFC Mid-Cap Opportunities Fund (Beta = 1.25) to maximize potential returns.
- Risk-averse investors may opt for a low-beta fund (Beta < 1) to minimize exposure to market fluctuations.
How to calculate Beta in Excel
| Date | Price | Fund Pct | Market Pct |
| 30-09-2008 | 8.288 | ||
| 31-10-2008 | 6.306 | -23.91% | -31.30% |
| 28-11-2008 | 5.739 | -8.99% | -7.28% |
| 31-12-2008 | 6.361 | 10.84% | 14.81% |
| 30-01-2009 | 5.893 | -7.36% | -7.80% |
| 27-02-2009 | 5.607 | -4.85% | -4.62% |
| 31-03-2009 | 5.876 | 4.80% | 6.86% |
| 29-04-2009 | 6.777 | 15.33% | 17.05% |
| 29-05-2009 | 8.695 | 28.30% | 45.49% |
| 30-06-2009 | 8.912 | 2.50% | 0.08% |
| 31-07-2009 | 9.819 | 10.18% | 9.42% |
| 31-08-2009 | 10.256 | 4.45% | 5.84% |
| 30-09-2009 | 11.096 | 8.19% | 8.65% |
| 30-10-2009 | 10.909 | -1.69% | -5.64% |
| 30-11-2009 | 11.613 | 6.45% | 8.01% |
| 31-12-2009 | 12.366 | 6.48% | 4.13% |
The Beta value for the given data is 0.75.
Here’s the breakdown of the calculations:
- Covariance of Fund and Market Returns = 0.0195 (=COVARIANCE.P(fund pct,market pct)
- Variance of Market Returns = 0.0261 (=VARIANCE.P(market pct)
- Beta (β) Calculation = 0.0195 / 0.0261 = 0.75
Interpretation:
- A Beta of 0.75 means the mutual fund is 25% less volatile than the market.
- If the market increases by 10%, the fund is expected to increase by 7.5%.
- If the market drops by 10%, the fund is expected to decline by 7.5%.
- This indicates a low-risk, stable investment option, suitable for conservative investors seeking less market fluctuation exposure
Difference between Beta and Alpha in mutual funds
| Feature | Beta in Mutual Funds | Alpha in Mutual Funds |
| Definition | Measures the volatility of a fund compared to the market | Measures a fund’s excess return over its benchmark, considering the risk taken (Beta) |
| Purpose | Assesses how much a fund moves in relation to the market | Evaluates whether a fund has delivered higher returns relative to the risk (Beta) taken |
| Risk Indicator | Reflects systematic (market) risk | Reflects the fund manager’s ability to generate returns beyond market expectations for the level of volatility assumed |
| Value Interpretation | Beta > 1 indicates higher risk and volatility; Beta < 1 suggests lower risk | Positive Alpha means the fund has outperformed its benchmark after adjusting for risk; Negative Alpha means underperformance |
| Use | Helps investors understand a fund’s risk exposure relative to the market | Determines whether a fund has generated returns beyond market movements, considering the risk level (Beta) taken |
| Focus | Market-driven volatility and responsiveness | Performance evaluation based on risk-adjusted returns |
| Calculation | Beta = Covariance (Fund Returns, Market Returns) / Variance of Market Returns | Alpha = (Fund Return – Benchmark Return) – (Beta × Market Risk Premium) |
| Key Difference | Shows how volatile a fund is compared to the market | Helps investors understand if the returns justify the volatility taken (Beta) |
| Example | HDFC Mid-Cap Opportunities Fund has a Beta of 1.3, meaning it is 30% more volatile than the market | If the same fund has an Alpha of 2%, it means it has outperformed its benchmark by 2%, considering the level of risk (Beta) taken |
Is a Higher or Lower Beta Better?
The ideal beta depends on an investor’s risk appetite, investment horizon, and market outlook. Understanding beta helps investors choose funds that align with their financial goals and ability to tolerate market fluctuations.
High Beta (>1) – Suitable for Aggressive Investors
Funds with beta greater than 1 tend to be more volatile than the market. These funds can deliver higher returns during bullish markets but may also experience greater losses in downturns. High-beta funds are best suited for investors who actively track market movements and can withstand short-term fluctuations for long-term capital appreciation.
- Example: UTI Nifty 500 Momentum 50 indexFund (Beta 1.20) – This fund moves 20% more than the market, making it a great option for growth-focused investors. It is ideal for those willing to take higher risk in pursuit of greater long-term rewards.
Low Beta (<1) – Best for Conservative Investors
Funds with beta less than 1 are less volatile than the market, making them a safer investment for those seeking stability and consistent returns. These funds perform well in bear markets and during periods of economic uncertainty, making them ideal for long-term wealth preservation.
- Example: SBI Bluechip Fund (Beta 0.90) – This fund is 10% less volatile than the market, making it an excellent choice for risk-averse investors seeking moderate, steady returns with reduced downside risk.
How to Choose Between High and Low Beta Funds?
- If you are an aggressive investor who can tolerate short-term volatility for higher long-term gains, choose high-beta funds.
- If you are a conservative investor who prefers steady and stable returns, opt for low-beta funds that offer downside protection.
Key Takeaways:
- High-beta funds are ideal for investors with higher risk tolerance and a long-term growth mindset.
- Low-beta funds are better for investors looking for stability and lower risk exposure.
- Beta should be analyzed along with other metrics like Alpha, Standard Deviation, and Sharpe Ratio to make an informed investment decision.
Investors should assess their financial goals, market conditions, and investment horizon before selecting funds based on their beta levels to balance risk and return effectively.
High Beta or Low Beta should not be the sole criteria for selecting the best mutual funds. Instead, fund selection should be based on multiple parameters to ensure a well-rounded evaluation.
Moreover, risk parameters are typically displayed for a 3-year period. Therefore, while analyzing returns, it is essential to ensure that both the returns and risk metrics are assessed over the same time frame for a more accurate comparison.
How to Identify Good Beta in Mutual Funds?
Identifying a good beta in mutual funds requires a holistic analysis of the fund’s performance, risk management, and alignment with your financial goals. Beta alone cannot determine the fund’s suitability; investors must consider multiple factors to make informed decisions.
key Factors to Consider:
Compare Beta Across Similar Funds
To determine whether a fund has an appropriate beta, compare it with other funds in the same category (large-cap, mid-cap, or small-cap). A mid-cap fund with a beta of 1.5 might be standard in its category, but a large-cap fund with the same beta might indicate excessive risk.
Analyze Historical Performance
Beta is a measure of volatility, but it should be considered alongside a fund’s long-term track record. A fund with a high beta should have consistent returns over different market cycles, demonstrating its ability to manage risk effectively.
Assess Market Conditions
Market conditions play a vital role in choosing the right beta level.
- In a bullish market, high-beta funds tend to outperform as they react more aggressively to market upswings.
- In a volatile or bearish market, low-beta funds help protect investments by reducing exposure to extreme price movements.
Evaluate Risk-Adjusted Returns
A fund’s beta should be analyzed in combination with other metrics like Alpha, Sharpe Ratio, and Standard Deviation. A high-beta fund with strong alpha (excess return over the benchmark) is generally a good investment, whereas a high-beta fund with negative alpha may indicate poor risk management.
Align Beta with Financial Goals
- Short-term investors or those with a low-risk appetite should consider low-beta funds that offer stability.
- Long-term investors can afford to take calculated risks with high-beta funds to potentially achieve higher capital appreciation over time.
Beta in Mid-Cap Mutual Funds
Mid-cap mutual funds are known for their potential to deliver high returns while carrying a moderate level of risk. Understanding beta in mid-cap mutual funds helps investors determine the volatility of these funds compared to the overall market. A well-balanced beta can indicate whether a fund is suitable for aggressive growth or risk management.
Motilal Oswal Midcap Dir
- Fund Return: 28.50%
- Beta: 1.15
- Calculated Alpha: 12.80%
Motilal Oswal Midcap Dir has a beta of 1.15, making it 15% more volatile than the market. This fund aggressively tracks market movements, offering high growth potential but also increased risk. It primarily invests in mid-sized companies with strong expansion prospects, making it ideal for aggressive investors with a long-term horizon. While it performs well in bullish markets, it can face steeper declines during corrections. Investors should evaluate its risk-adjusted returns, Sharpe ratio, and alpha to ensure alignment with their financial goals.
HDFC Mid-Cap Opportunities Dir
- Fund Return: 25.75%
- Beta: 1.10
- Calculated Alpha: 10.50%
HDFC Mid-Cap Opportunities Dir Fund has a beta of 1.10, making it 10% more volatile than the market. It balances risk and reward, investing in mid-sized companies with strong growth potential. This fund is ideal for investors seeking steady long-term capital appreciation while tolerating moderate volatility.
During market upswings, it can outperform the broader market, but it may also see sharper declines in downturns. Its diversified portfolio helps manage risk, making it a solid mid-cap choice for those aiming for consistent wealth creation. Investors should consider its historical performance and risk-adjusted returns before investing.
Edelweiss Mid Cap Dir
- Fund Return: 29.20%
- Beta: 1.20
- Calculated Alpha: 14.30%
Edelweiss Mid Cap Dir stands out with a beta of 1.20, signifying 20% higher volatility compared to the market. While this level of risk can lead to fluctuations, the alpha of 14.30% highlights the fund's ability to outperform the benchmark. The fund manager's strategy has successfully leveraged market movements to generate high returns. This fund is well-suited for aggressive investors willing to accept short-term volatility in exchange for long-term growth potential.
FAQs on Beta in Mutual Funds
- What is Beta in Mutual Funds?
Beta measures a fund’s volatility relative to the market. A beta of 1 moves with the market, >1 indicates higher volatility, and <1 suggests lower volatility.
- Why is Beta Important?
Beta helps assess risk—high beta funds offer higher returns with more risk, while low beta funds provide stability with moderate returns.
- How is Beta Calculated in Mutual Funds?
Beta is calculated using the formula:
Beta = Covariance (Fund Returns, Market Returns) / Variance of Market Returns
It measures how much the fund moves in response to market changes.
- Who Should Invest in High or Low Beta Funds?
Aggressive investors seeking growth may choose high-beta funds, while conservative investors preferring stability should opt for low-beta funds.
- What is a Good Beta in Mutual Funds?
A beta between 0.8 and 1.2 is considered balanced. Above 1.2 suits risk-takers, while below 0.8 is ideal for risk-averse investors.
Conclusion:
Beta in mutual funds is a key metric that measures a fund’s volatility relative to the market, providing insights into the relationship between risk and return. Alpha and beta in mutual funds help investors assess fund performance—while beta indicates volatility.alpha measures the excess return of the fund over its benchmark. High-beta funds, such as Edelweiss Mid Cap Dir (Beta 1.20), are more volatile and suit aggressive investors seeking higher returns, whereas low-beta funds, like SBI Bluechip Fund (Beta 0.90), are less volatile and ideal for conservative investors looking for stability.
When evaluating mutual fund risk, it’s crucial to analyze alpha and beta alongside other factors like the Sharpe ratio, standard deviation, and risk-adjusted return. Beta calculated through the Capital Asset Pricing Model (CAPM) helps determine a fund’s sensitivity to market fluctuations. Understanding alpha and beta in mutual funds enables investors to align their investments with their risk profile, optimize returns, and manage volatility for long-term financial success
