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Negative alpha of a fund

Find out if you should switch from a fund if its alpha is negative

I invested in IDFC Premier Equity Fund through SIPs. The alpha of the fund is negative now. Should I switch from this fund?

IDFC Premier Equity is a five-star rated fund and you should continue investing in it. Alpha measures the excess return a fund generates above the expected rate of return. The expected rate of return is based on its risk- beta. A positive alpha indicates the fund has performed better than expected, given its beta. And a negative alpha indicates the fund has underperformed for the given risk.

At Value Research, we take Nifty as the benchmark for every equity fund to calculate alpha it generates. This makes the returns comparable. Hence, the alpha generated by a fund in a category is a relative reference. If you look at alpha of all the funds in the mid and small cap category, you will see that barring six funds, all funds in the category have generated negative alpha. IDFC Premier Equity has although generated negative alpha but it is still the twelfth highest alpha generator in the category. This means the difference between the actual returns of the fund and expected return is among the lowest in the category.

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