Glide Invest FAQ: What are some of the risk parameters associated with Mutual Funds?

What are some of the risk parameters associated with Mutual Funds?

Standard Deviation: is a measure of evaluating the risk caused by the volatility. It tells how much a fund’s performance deviates over a time-frame. Higher the standard deviation, the higher the risk taken by the fund.

Risk-adjusted return: is the amount of risk taken by a fund to earn the return and is a useful parameter to compare funds within a particular category.

Sharpe Ratio: compares the return an investor is getting with the level of risk taken by fund. To calculate Sharpe ratio, you have to find the difference between the return of a fund and the risk-free return, and divide the result by the standard deviation of the fund.
Sharpe Ratio = (Fund return – Risk-free return)/Standard deviation of the fund

Sortino Ratio: helps to determine a fund’s ability to contain the downside risk during a depressing market condition. Unlike the Sharpe ratio, Sortino uses only downside deviation for calculating the volatility.
Sortino Ratio = (Portfolio Return – Risk Free Return) / Downside Deviation

Treynor Ratio: determines the excess returns earned for the risk taken by the fund. It is also called the reward-to-volatility ratio. Treynor ratio uses the ‘Beta’ of the fund (volatility of a fund compared to the systematic market risk). The idea is to evaluate the value added for the risk taken by the investor.
Treynor Ratio = (Fund return – Risk-free return)/Beta of the fund

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