The stock market ratio is seen by the investors investing their money in the stocks to get a good return. The companies invest their money on the basis of the returns and the stock carries risk. The risk in the stock market is not carried by the Stock only but there are mutual funds that also carry the risk. Mutual funds are the investment which is made by the people who do not want to invest in the market directly and the investment made through these funds are systematically collected money, the investment in these funds can be as low as Rs. 500 per month.
The investment in these funds can be made on the mood of the investor for how much time he wants to invest. These funds are managed by a knowledgeable person who invests as per the market situation, examples of these funds can be said as ICICI Prudential Fund, SBI Mutual Fund, HDFC Index Fund, and other funds as well.
There are funds that provide the option of getting the taxes reduced as there are funds that provide a reduction in taxes. These risks are interconnected with each other as they help in getting The risk of any mutual fund is determined by various attributes, which include –
- Beta
- Alpha
- Standard Deviation
- Sharpe Ratio
BETA RATIO
It is one of the key ratios in the market. It is essential for the calculation of the Beta. It gives the information of sensitivity of the movement of the market of mutual funds. It is the benchmark index of the fund, which gives the point to which the fund is good or not to invest. Whether the fund is investable or not is provided by the closeness of the fund to the value 1.
We can say if the fund is less than 1% then it is investable but if the fund is close to 1%, for example, 0.97%, then the fund must is slightly less risky as it is close to 1 and if the fund is 0.64%, then the fund is less risky if the market falls by a great margin as well. The beta is a measure of the relative risk of any fund or stock.
ALPHA RATIO
It is defined as an excess return to the mutual fund over the benchmark return, on a risk-adjusted basis. In simple words, it can be said that it will give a person the idea of excess return that an investor can get, in its investment fund may generate. It gives a risk-adjusted performance of an investment.
The formula for calculating the Alpha Ratio is – (Mutual Fund Return – Risk-Free Return) – (Benchmark Return – Risk-free Return) X Beta.
STANDARD DEVIATION RATIO
It is a statistical tool of measurement. It measures the deviation of average from the mean. When seen the case of mutual funds, it tells how much the portfolio is going away from the right course from the expected return from the market. It also represents the riskiness of a stock or mutual fund, in which the person wants to expect the money.
It is provided in the percentage figure of a stock or fund annually. The higher the standard deviation, the higher the volatility, and the higher the volatility, the higher the risk.
If a person investing in high volatility markets, must understand how they need to learn on the volatility, which can be managed by either smartly diversifying in the market which means investing in different stocks, or providing time for the investment which means a person must learn to give time to the investment where the investment to be given a time for more than a year, then the investment is either bought out continued to let the money grow in the market.
SHARPE RATIO
It was invented by an American Economist in the year 1966 by William F Sharpe. He was awarded Nobel Prize in the year 1990 for his work on the Capital Asset Pricing Model. It uses the value given by Standard Deviation to measure the mutual fund’s risk-adjusted returns.
It will provide information of how the portfolio has performed in excess of risk-free returns which are invested in the private securities as government securities are free of risk, as risk is very less on them.
This gives the idea, of the investment made by the person is of good risk or the investment is a smart move for the future. It considers the risk which goes with the price only. It does not consider credit rate risk or interest rate risk. The better is the Sharpe ratio, the better is the fund.
Formula of Sharpe Ratio– (Fund Return – Risk-Free return) / Standard Deviation of Fund.
REVIEWS ON RATIO's IN STOCK MARKET
The indicators help an investor to invest in the stock or fund. The Stocks or the funds are volatile to the market conditions as the price changes significantly, the market changes its position according to demand and supply of stock. The fund’s amount is in huge numbers as before investing, a person knows the risks associated with the funds, but the investment in these funds is a better option for an individual who doesn’t know about the market.
