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Reader’s question: Can you explain alpha for mutual fund? - Kalpesh Savant
You check your mutual fund's returns. The number looks good. Better than the market, in fact. You feel like you made a smart choice.
But what if that return came at a cost you never saw? What if your fund took on far more risk than it needed to and you are being paid less per unit of risk than a more careful fund that delivered the same number?
That is the gap alpha tries to close. It measures not just whether a mutual fund beat its benchmark, but whether it did so after accounting for the risk it took. In simple terms, alpha is the fund manager's value addition. A measure of skill rather than luck or brute-force risk-taking.
A simple example
Say a fund has delivered 20 per cent returns over three years while its benchmark returned 15 per cent. The raw excess return is 5 per cent. But is that the alpha?
Not necessarily. It depends on how much risk the fund took.
Assume the fund's beta is 0.85. A beta of 0.85 means the fund is slightly less volatile than the market. When the market rises or falls by 1 per cent, this fund tends to rise or fall by only 0.85 per cent. Also assume the risk-free rate, what you would earn on a safe government bond, was 3 per cent.
The expected return and alpha are calculated as follows:
Expected return = Risk-free rate + Beta x (Market return - Risk-free rate)
= 3% + 0.85 x (15% - 3%)
= 3% + 0.85 x 12%
= 3% + 10.2%
= 13.2%
Alpha = Actual return - Expected return
= 20% - 13.2%
= 6.8%
Notice something. The raw excess return was 5 per cent. But the true alpha is 6.8 per cent, higher, because the fund achieved its return while taking less risk than the benchmark. A fund that takes less risk than the market but still outperforms it has done something genuinely impressive. Alpha captures that. Raw excess return does not.
Positive alpha means the manager added genuine value. Negative alpha means they did not. Zero means they delivered exactly what their risk level would predict.
Which category produces the most alpha?
The concept is clear in theory. But how does alpha actually look across Indian active funds today?
The alpha leaderboard
Here is where active management is actually adding value
| Category | % of funds with positive alpha | Average alpha of 5 highest-alpha funds - 3Y alpha (%) |
|---|---|---|
| Value | 95.7 | 7.4 |
| Large and mid cap | 92.3 | 8.4 |
| Large cap | 77.4 | 4.7 |
| Flexi cap | 71.4 | 7.3 |
| Small cap | 70.8 | 7 |
| Mid cap | 65.5 | 4.8 |
| Categorisation as per Value Research. Data as of June 29, 2026. Based on active funds with available alpha data. | ||
Value and large-and-mid-cap funds show the highest hit rates, with over nine in 10 funds generating positive alpha. Mid-cap has the lowest at 65.5 per cent. Among the five highest-alpha funds in each category, four categories show average alpha above 5 per cent, with large-and-mid-cap leading at 8.4 per cent. Note that these figures reflect only the top five funds by alpha in each category, not the category as a whole.
What alpha cannot tell you on its own
A fund with strong alpha over one or two years can disappoint in the next. Markets change. What worked in a bull run may not work in a correction. Consistency across market cycles matters more than a single good number.
Pair alpha with other measures. Standard deviation measures how much returns swing from month to month. The Sharpe ratio shows how much return the fund earned per unit of risk taken. Together these give a fuller picture than any single number.
For actively managed funds, a consistently positive alpha over long periods is worth paying attention to. It suggests the fund manager has genuinely earned their fees, not just ridden a rising market. That said, consider other factors too when choosing a fund.
Knowing which funds have earned their alpha and whether any of them belong in your portfolio is exactly what Value Research Fund Advisor is built for. It looks beyond a single metric to give you a clear view of what to keep, what to drop and what to buy next.
This article was originally published on June 29, 2026.
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