Stop Falling For Mutual Fund Ads! Top 5 Ratios That Expose A Mutual Fund’s Real Story

Every mutual fund ad wants you to believe one thing: "Look at how much money we made!"

Past returns are flaunted like they're proof of genius. But if you've spent more than 15 minutes inside a market cycle, you know this: returns alone mean nothing. They don't tell you how those returns came, how risky they were, whether they'll last, or even whether they were worth the fees.

To see the truth behind a fund's performance, you have to look beyond the glossy return number to what's buried deeper in the factsheet: a few financial ratios that don't care about marketing spin. These ratios are where a fund's real personality leaks out.

Let's break down each of these metrics:

1. Alpha - The Fund Manager's Signature

Alpha is the extra return a fund gives you compared to its benchmark - like the Nifty 50 or Sensex - after accounting for the level of risk it took to get there.

In other words, if your fund is taking the same amount of risk as the Nifty 50, is it giving you more return than the Nifty 50? If yes, that's positive alpha. If not, you're paying active fees for a glorified index clone.

"Why it matters: Mutual funds charge a fee called the expense ratio, which is supposed to pay for a fund manager's expertise. That cost is only justified if the manager is consistently beating the market, not matching it," said Chakrivardhan Kuppala, Cofounder & Executive Director, Prime Wealth Finserv Pvt Ltd.

If you see negative or flat alpha, it raises two critical red flags:

• You're paying extra for underperformance
• The fund's strategy might just be closet indexing - shadowing the benchmark but charging like it's not

For example, suppose a mid-cap fund gives a return of 13%, and the mid-cap index delivers 12%. If the fund took more risk to get there (say, by overexposure to volatile stocks), the alpha might still be close to zero. Because the risk was higher, the outperformance wasn't efficient - it was reckless.

How to use it:

• Look at rolling alpha over 3-year and 5-year periods, not just point-in-time data
• Compare alpha after fees - some fund houses show pre-expense alpha to look better
• A good active fund should aim for 1-2% positive alpha consistently.

2. Sharpe Ratio - Measuring the Efficiency of Risk

The Sharpe ratio answers one critical question: How well is your fund converting risk into return?

It's calculated by taking the fund's return (minus the risk-free rate) and dividing it by its volatility (standard deviation). The result tells you how much return you're getting per unit of risk taken.

Why it matters: Two funds may both return 12%, but if one did it with lower volatility, it was clearly the better ride. Sharpe doesn't just reward performance; it rewards smart performance.

For example:

Let's say:

• Fund A: Return = 12%, Standard Deviation = 8 → Sharpe = 1.5
• Fund B: Return = 12%, Standard Deviation = 12 → Sharpe = 1.0

Fund A was more efficient. Fund B had more stomach-churning swings for the same result.

How to use it:

• Sharpe ratios above 1.0 are generally acceptable
• Above 2.0 is excellent - especially if consistent across time
• Compare Sharpe across similar fund categories - large-cap vs large-cap, not apples to mid-cap oranges

"Sharpe ratios can look temporarily high during bull markets when volatility drops. What matters more is how Sharpe behaves in falling markets - that shows true risk efficiency," said Chakrivardhan Kuppala.

3. Beta - A Fund's Sensitivity to the Market

Beta measures how much a fund moves relative to its benchmark. If the Nifty 50 goes up by 1% and your fund goes up by 1.2%, it has a beta of 1.2.

• Beta > 1: More volatile than the market
• Beta
• Beta = 1: Matches the market's movement

Why it matters: Beta doesn't tell you whether the fund is good - it tells you what kind of ride you're signing up for.

"A fund with a beta of 1.5 will swing much harder than the market - both up and down. If you're risk-tolerant and chasing growth, that might be fine. But if you're looking for stability, it's a red flag," said Chakrivardhan Kuppala.

How to use it:

• High beta is not necessarily bad - but it must be justified by high alpha
• A low beta fund with poor returns is not defensive - it's deadweight
• A high beta fund with no extra alpha = you're taking more risk for no benefit

Watch out: If an actively managed fund has a beta close to 1 and no alpha, it's mimicking the index. You're paying extra for what a low-cost index fund can do better.

4. Standard Deviation - The Raw Volatility Meter

Standard deviation tells you how much a fund's returns deviate from their average - how "spread out" the performance is.

High standard deviation = wild swings. Low SD = stable journey.

Why it matters: As per Chakrivardhan Kuppala, standard deviation treats all volatility equally - whether it's gains or losses. So a fund that suddenly shoots up 25% will show high deviation - even though it's a "good" spike. That's why SD should never be looked at in isolation.

How to use it:

• Combine it with Sharpe - if Sharpe is high and SD is high, the fund is taking risk but managing it well
• Use SD to test your own comfort zone - if you're the type to panic at losses, don't pick a high SD fund just because it looks exciting on paper
• Compare SD within the same category - small-cap funds will always have higher SD than large-caps

Red Flag: If a fund claims to be conservative or stable and has a high SD, its strategy isn't aligned with its pitch.

5. Portfolio Turnover Ratio - The Fund Manager's Temperament

This ratio tells you how much of a fund's portfolio was bought or sold in a year. A 100% turnover means the manager sold and replaced the entire portfolio in 12 months.

Why it matters: A fund's turnover ratio tells you how often the fund manager is buying and selling stocks within a year. And that number speaks volumes about how the fund is being run.

"A low turnover ratio (say, below 30-40%) usually means the manager is sticking to a buy-and-hold strategy - they've done their homework, picked their bets, and are letting them play out. That shows conviction," commented Chakrivardhan Kuppala.

On the other hand, a high turnover ratio (anything above 100%) means the portfolio is changing constantly. Now, that could mean the manager is being tactical - reacting quickly to market opportunities. But it could also mean they're just unsure, chasing trends, or trying to time the market. That's not a strategy. That's flailing.

And here's the problem: high turnover isn't free.

Look at the kind of fund: For niche funds - like sector or thematic ones - higher turnover is expected. They're playing a different game.

"But for your core mutual fund holdings - like large-cap or diversified equity funds - the turnover ratio should be in check. Ideally, it stays moderate, and more importantly, it pairs well with strong alpha (that means the fund is delivering real outperformance)," commented Chakrivardhan Kuppala.

Final Thought

Fund returns are like exam results. The ratios tell you how the student studied, whether they cheated, and whether they'll keep scoring next year.

If you're building wealth over 10, 20, 30 years, you can't afford to be hypnotised by high recent returns. You need to understand process quality - and that's exactly what these hidden ratios reveal.

Disclaimer: The views and recommendations expressed are solely those of the individual analysts or entities and do not reflect the views of GoodReturns.in or Greynium Information Technologies Private Limited (together referred as “we”). We do not guarantee, endorse or take responsibility for the accuracy, completeness or reliability of any content, nor do we provide any investment advice or solicit the purchase or sale of securities. All information is provided for informational and educational purposes only and should be independently verified from licensed financial advisors before making any investment decisions.