A common mistake among investors is treating returns as the sole measure of performance. While returns determine how much wealth a fund has created, they say little about the amount of risk taken to generate those gains.
This distinction is particularly important when comparing equity mutual funds. Two schemes may belong to the same category and deliver broadly similar returns, yet one may have achieved those returns by taking significantly greater exposure to market volatility. In such cases, the fund with the higher return is not necessarily the one that delivered the better investment experience.
The comparison between JM Flexi Cap Fund and Parag Parikh Flexi Cap Fund offers a useful example. Over the past three years, JM Flexi Cap generated an annualised return of 17.96%, compared with 15.31% for Parag Parikh Flexi Cap. Yet the gap in returns was far smaller than the gap in risk.
Standard deviation gap
Standard deviation measures how much a fund’s returns fluctuate around its average return over time.
Over the last 3 years, Parag Parikh Flexi Cap recorded a standard deviation of 9.91, while JM Flexi Cap stood at 17.44, according to Value Research.
This indicates that JM Flexi Cap delivered higher returns, but with substantially more fluctuation along the way. For investors, this translates into a far bumpier investment experience despite operating in the same category.
Higher market sensitivity in JM Flexi Cap
Beta measures how sensitive a fund is to movements in its benchmark index. It shows whether a fund tends to move more or less than the broader market.
A beta of 1 means the fund broadly moves in line with the market. If the market rises 10%, the fund is expected to rise around 10%, and similarly fall in a downturn. A beta above 1 indicates higher sensitivity to market movements, meaning both gains and losses are amplified. A beta below 1 indicates lower sensitivity and a more defensive profile.
Parag Parikh Flexi Cap had a beta of 0.60, indicating it moved less with the market. JM Flexi Cap recorded a beta of 1.05, indicating slightly higher sensitivity than the market itself. This suggests JM Flexi Cap participated more aggressively in market movements, capturing more upside in rallies but also exposing investors to greater downside risk during corrections.
Sharpe ratio advantage for Parag Parikh
The measures how much excess return a fund generates for each unit of total risk taken. It evaluates whether higher returns were achieved efficiently or simply by taking on more risk.
Parag Parikh Flexi Cap recorded a Sharpe ratio of 0.93, compared with 0.72 for JM Flexi Cap. Despite lower absolute returns, Parag Parikh generated better risk-adjusted performance. JM Flexi Cap’s came at the cost of disproportionately higher risk.
Downside risk
The Sortino ratio refines the approach used by Sharpe ratio by focusing only on downside volatility. Unlike standard deviation, it ignores upside fluctuations and considers only negative return movements that typically matter more to investors.
Parag Parikh Flexi Cap came out ahead here as well.
The fund recorded a Sortino ratio of 1.26, compared with 0.95 for JM Flexi Cap.
The higher ratio indicates that Parag Parikh delivered better returns relative to the downside risk borne by investors. The result reinforces the conclusion drawn from the Sharpe ratio and suggests that the fund’s risk-adjusted performance remained superior.
Similar alpha
Alpha measures a fund’s return after adjusting for the risk it has taken. It helps isolate whether performance is driven by market exposure and risk-taking or by genuine investment skill.
Parag Parikh Flexi Cap recorded an alpha of 4.38, while JM Flexi Cap posted 4.21.
The difference is minimal. This suggests that once risk is accounted for, the contribution of fund management skill is broadly similar across both schemes. The higher return in JM Flexi Cap appears to be driven more by higher risk exposure rather than a meaningful edge in stock selection.
Takeaway for Investors
Returns alone provide an incomplete picture of mutual fund performance. They show outcomes, but not the risk taken to achieve them. Risk ratios such as standard deviation, beta, Sharpe ratio, Sortino ratio and alpha help bridge this gap by capturing volatility, market sensitivity, downside risk and efficiency of returns.
For investors, incorporating these measures into fund selection can significantly improve decision-making quality. It helps distinguish between funds that simply earned more and those that earned better on a risk-adjusted basis.