Alpha

Investments

Alpha measures a mutual fund manager's ability to generate returns above the benchmark index. Positive alpha means the fund beat its benchmark after adjusting for risk. It is the value the fund manager added (or destroyed) over passive index investing.

In detail

Alpha = Fund return - Benchmark return (risk-adjusted)nnPositive alpha: manager outperformed. Negative alpha: manager underperformed.nnIndia reality: Most large-cap active funds have negative alpha over 10-15 year periods after expense ratios. SPIVA India Scorecard shows 70-80% of large-cap active funds underperform their benchmark over 10 years. This is the primary argument for passive index investing.nnMid and small cap: some Indian fund managers have demonstrated consistent positive alpha in mid/small-cap space where markets are less efficiently priced.

Formula

Alpha = Portfolio return - [Risk-free rate + Beta x (Market return - Risk-free rate)]nSimplified: Fund 3-year return - Nifty 50 3-year return = Raw alpha (before risk adjustment)

Real-life example

🇮🇳 India example

Fund A: 3-year return 15.2%. Nifty 50 same period: 12.8%. Raw alpha = +2.4%. Expense ratio: 1.5%. Net alpha = +0.9%. This is a modest outperformance. Parag Parikh Flexi Cap has historically shown consistent positive alpha vs peers -- one of the rarer cases of verified active management value.

Frequently asked questions

How do I check a fund's alpha? ▼

Platforms like ValueResearch, Morningstar India, and MFCentral show 1, 3, and 5-year alpha. Focus on 5-10 year rolling alpha rather than recent alpha -- short-term outperformance is often luck. A fund consistently generating 2%+ alpha over 10 years is genuinely skilled management.