6 mutual fund ratios that can make or break your financial freedom journey

All of us invest because we want to make money, and some aggressive investors, who are ready to take on more risk, take that extra effort to make even more money.

We all invest in mutual funds with the hope of growing our wealth, but how many of us really understand what’s happening behind the numbers?

The selection of a mutual fund is a debatable issue. But six key mutual fund ratios can truly make or break your financial freedom journey.

Before reading further, please note that this is just for informational purposes only and not intended to recommend any of the schemes mentioned below.

What are 6 mutual fund ratios that can make or break your financial freedom journey?

These are beta, standard deviation, fama, sharpe ratio, expense ratio, and Information ratio. Knowing what these ratios mean can help you move beyond guesswork and make smarter, more confident investment decisions.

Mutual fund ratios explained for first-time investors

When you decide to start investing in mutual funds, what is the first thing that you do? You generally see the returns of the fund houses, and then you decide to put your money in the one that has better returns.

It’s natural to focus only on returns. But returns don’t tell the full story. Two funds can give the same returns, but one may be far riskier than the other.

That’s why understanding a few basic ratios can help you choose better funds.

This tells you how closely your fund follows the market.

Beta = 1: Your fund moves just like the market

Beta > 1: Your fund moves faster than the market (more ups and downs)

Beta < 1: Your fund moves more slowly than the market (more stable)

"We always compare the fund performance versus the benchmark, so one should especially look at the Beta of the fund along with the performance. If the Beta is more than 1, the fund's risk is higher than the benchmark and thus should deliver better returns versus the benchmark; if it doesn't, then the risk of investing in such a fund is not worth it. Similarly, if the fund's Beta is less than 1 and is outperforming the benchmark index, then it is a very positive sign, as it can perform better even after having lesser risk/volatility versus the benchmark index," said Ronak Morjaria, Partner at ValueCurve Financial Services.

Standard deviation simply tells you how much your fund fluctuates.

• High standard deviation means sharp ups and downs.

• Low standard deviation means smoother, more stable returns.

For new investors, big sudden falls can trigger panic selling. Funds with lower volatility are easier to stay invested in and help you stick to your long-term plan.

Alpha shows whether the fund manager is doing a good job.

• Positive Alpha means the manager added value

• Negative Alpha means the manager failed to beat expectations

Markets move on their own, but Alpha tells you if returns came from skill. Investors should always prefer funds with consistently positive Alpha, not just one-year performance.

• Sharpe ratio tells you if the risk you are taking is worth the return.

• Higher sharpe ratio means better reward for the risk taken.

Economist William F. Sharpe introduced the sharpe ratio in 1966 as part of his research on the Capital Asset Pricing Model (CAPM).

The annual price a mutual fund charges to cover its operational costs, including marketing, administrative, and management fees, is known as the expense ratio. By dividing the total expenses by the average assets under management, one can get a mutual fund's expense ratio.

Your investment returns are directly impacted by the expenditure ratio. Your long-term investment returns will be lower the higher the expense ratio.

The rule came into effect three months later, so funds began showing Information Ratios from around April 2025.