Alpha — Mutual Fund Term Explained

The excess return a fund generates over its benchmark. Positive alpha means the manager added value beyond what the market delivered.

Alpha measures how much a fund outperformed (positive) or underperformed (negative) its benchmark, after adjusting for market risk (beta). It represents value added by the fund manager.

Most actively managed funds in India struggle to generate consistent positive alpha over 10+ year periods.

Formula

Alpha = Fund Return − [Risk-Free Rate + Beta × (Market Return − Risk-Free Rate)]

Example

Fund returned 15%, Nifty 50 returned 12%, Risk-free rate 6%, Beta 1.0 → Alpha = +3%

Related terms

• Beta — A measure of a fund's sensitivity to market movements. Beta of 1 moves with the market; >1 means amplified moves; <1 means dampened moves.
• Benchmark — The market index a fund is compared against. A fund manager must beat the benchmark consistently to justify active management fees.
• Sharpe Ratio — Return per unit of total risk taken. Higher is better. Shows how much excess return you earn for each unit of volatility.
• Jensen's Alpha — Risk-adjusted excess return using CAPM. Shows if the manager beat what you would expect given the market risk taken.

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