Understanding Risk-Adjusted Performance in Mutual Funds. When people bring up mutual funds investment in India, they usually talk only about returns. High returns bring in investors like moths to a flame, even if they are full of risks, especially new investors. But returns alone are not enough to build a safe financial wealth. Because if you ignore the risks, then you might end up with a portfolio that looks good on paper but keeps you awake at night.
Let’s understand how returns can be misleading and why you must consider balanced performance instead.
Why Returns Alone Don’t Tell the Whole Story
Many mutual fund investors in India choose the fund with the highest 1 to 5 year returns. But here’s the flip side:
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A fund may have delivered higher returns by taking a huge amount of risks.
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Another fund may also have given stable returns with lower ups and downs in the market.
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In a market upswing, almost every mutual fund comes off as an impressive choice.
So, which one is a really better option to choose?
Enter Risk-Adjusted Performance
Risk-adjusted returns in mutual funds means you measure how much return a fund gives for the amount of risk it takes in during the market volatility. Here are the two famous measures:
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Sharpe Ratio: It mainly shows how much extra returns you earn for each unit of risk. A higher Sharpe ratio means better risk-adjusted returns on your mutual fund investment.
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Sortino Ratio: It mainly focuses on potential losses, which is bad volatility. It’s even better for judging mutual funds for steady growth in India.
Real Example: Equity vs Balanced Fund
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A pure equity fund may show 15% of returns every year.
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A balanced mutual fund may show 12% of returns every year.
At first sight, you will choose the equity fund. But if the equity fund’s market ups and downs are double that of the balanced fund, then your actual reward per unit of risk could be worse.
This is the reason why experienced investors always check risk-adjusted performance of mutual funds before investing in mutual funds in India.
How to Use This Knowledge
When going over your funds, you just don’t look at the past returns. Instead you need to follow these steps:
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Check the fund’s Shape Ratio and Sortino Ratio, because most fund factsheets and websites like Value Research Online and Morningstar India show these numbers.
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Compare funds in the same category like large-cap with large-cap only, not with mid-cap or small-cap.
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Always look at standard deviation because it shows you how volatile the fund is.
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Diversify smartly by not putting all your money in high-risk funds looking for high returns all the time. Diversify your portfolio for balanced risks and returns.
Final Thoughts
Returns can look attractive, but the real wealth comes from balancing a portfolio based on your risk and reward. So, before you pick a fund, make sure to think about how much risk you’re taking for this return.
If you are planning for mutual funds investment in India, then always focus on a best mutual fund portfolio strategy for 2025 and learn how to choose the right mutual fund in India.