Before investing your hard earned money in the right mutual fund scheme, you should do a thorough investigation. While investors often choose between the category of schemes and the best performing schemes, they tend to ignore the risk indicators of these schemes. When you are comparing schemes, don't forget to compare their risks. Although there are several risk indicators like standard deviation, beta and Sharpe ratio given in the factsheet of each scheme, the product label is the most basic thing when seen. The riskometer in the label indicates the level of risk of that fund. This riskometer is a mandatory requirement from SEBI and reflects the underlying/principal risk associated with the fund. Six levels of risk are associated with different categories of mutual funds, depending on the level of risk in the investor's portfolio, ranging from low, low to medium, medium, medium high, high and very high. As defined by SEBI, all mutual funds are therefore bound to classify similar types of funds in the same category of risk.
In addition to the Riskometer, which gives you an overview of a fund's risk, one can also look at the more specific risk indicators given in the fact-sheet. Standard deviation measures the range of returns a fund can make. The highest standard deviation of returns in a scheme indicates that it has a very wide range of performance, which also means high volatility.
Beta measures the volatility of a fund with respect to the market. Beta > 1 means the scheme will be more volatile than the market and Beta < 1 means that it will be less volatile than the market. A beta of 1 indicates that the scheme will move with the volatility of the market. Beta means the scheme will be more volatile than the market and Beta < 1 means it will be less volatile than the market. Beta of 1 means that the scheme will go along with the volatility of the market.
The Sharpe Ratio measures the additional return provided by that fund along with the per unit risk taken by the fund. It is a good indicator of risk-adjusted returns.
Next time you research about which scheme to invest in, don't forget to evaluate it on the above risk parameters.