According to Value Research screening, seven active equity mutual funds currently deliver alpha above 10%, with the Franklin India Technology Fund leading at 11.07% alpha. The DSP Natural Resources and New Energy Fund follows with 10.93% alpha, while the Invesco India Financial Services Fund ranks third with 10.71% alpha. The Quant Value Fund and Motilal Oswal Large and Mid Cap Fund complete the top five with 10.59% and 10.49% alpha respectively. These funds have consistently outperformed their benchmark indices through active stock selection and portfolio management strategies, though experts caution against using alpha as the sole investment criterion.
As reported by Value Research, alpha measures a fund's excess return compared to its benchmark after adjusting for risk. The baseline alpha is 0%, indicating the fund has delivered the same return as the benchmark index. A positive alpha greater than 0 indicates outperformance, while negative alpha shows underperformance. For example, if a fund generates 15% returns while its benchmark delivers 12%, the fund has created 3% alpha. Alpha attempts to quantify this outperformance after considering market risk, with higher alpha indicating greater excess return generation by the fund manager through stock selection and portfolio management. According to recent analysis, benchmarks serve as more than just performance reference points, telling investors about the fund's target market segment, investment approach, and whether the fund manager is delivering on stated objectives.
Despite recurring turbulence in the equity market, smallcap funds emerged as the strongest category with 24 out of 30 schemes beating benchmark index returns over the past year. As per Value Research data, flexicap funds also recorded strong outperformance with 28 out of 40 schemes beating the Nifty 500 TRI, while largecap funds delivered relatively muted performance with only about half the schemes outperforming. Midcap funds posted a lower outperformance ratio of around 57%. Experts attributed smallcap fund performance to improved market breadth, greater stock-picking opportunities, and market recovery following sharp corrections. Nilesh Naik from PhonePe Mutual Funds noted that smallcap funds saw significant correction around a year back, with the Nifty Small Cap 250 TRI down almost 15% in the last quarter of FY25, while the Nifty 50 TRI remained relatively flat.
According to Value Research analysis, the seven funds show meaningful diversity in risk profiles despite their high alpha performance. The DSP Natural Resources and New Energy Fund leads with a Sharpe ratio of 1.17, followed by Bandhan Small Cap Fund at 1.10 and Franklin India Opportunities Fund at 1.04. All three funds comfortably cross the 1.0 threshold, suggesting relatively better risk-adjusted returns. The Sortino ratio measures downside risk management, with DSP Natural Resources and New Energy Fund again leading at 1.94, followed by Quant Value Fund at 1.85 and Bandhan Small Cap Fund at 1.76. All seven funds carry a 'Very High' riskometer rating, indicating significant market sensitivity. Recent guidance emphasizes that benchmark comparison across periods such as 1 year, 3 years, or 5 years can help provide a broader view of performance across different market phases instead of relying only on short-term trends.
As reported by Value Research, investors should evaluate alpha alongside multiple factors including investment objective, benchmark consistency, portfolio quality, fund manager track record, and personal risk tolerance. Alpha is a backward-looking measure and should not be treated as a guarantee of future performance. For example, if a benchmark rises 20% and a fund rises 17%, the investor still earns a positive return despite negative alpha. The analysis emphasizes that high alpha can result from concentrated sector bets, high-risk stock investments, or favorable market cycles that may not be sustainable long-term. Most importantly, alpha tells what a fund manager achieved in the past, not what the fund will deliver in the future, making it crucial to evaluate multiple evaluation tools rather than relying solely on alpha performance. Recent analysis notes that benchmark outperformance may not provide the complete picture if the fund has taken significantly higher risk or if the benchmark itself is not relevant to the fund category.
