Alpha measures a fund manager's skill after adjusting for risk taken, representing the fund manager's value addition rather than luck or brute-force risk-taking. According to reports from Value Research, alpha is calculated as the fund's actual return minus the expected return based on market risk and the fund's beta. A simple example demonstrates this concept: a fund delivering 20% returns over three years while its benchmark returned 15% might appear to have a 5% excess return, but the true alpha depends on the fund's beta and risk-free rate.
Value and large-and-mid-cap funds lead in alpha generation, with over 90% of funds in these categories generating positive alpha. As reported by Value Research, the alpha leaderboard shows value funds at 95.7% positive alpha with an average of 7.4% among the top five funds, while large-and-mid-cap funds achieve 92.3% positive alpha with 8.4% average alpha. Large cap funds follow at 77.4% positive alpha with 4.7% average alpha, followed by flexi cap at 71.4% positive alpha with 7.3% average alpha. Small cap funds show 70.8% positive alpha with 7% average alpha, while mid cap funds have the lowest performance at 65.5% positive alpha with 4.8% average alpha.
The alpha calculation demonstrates the importance of risk-adjusted returns over raw excess returns. According to Value Research analysis, a fund with a beta of 0.85 that delivers 20% returns while its benchmark returns 15% actually generates 6.8% alpha after accounting for the reduced volatility. This example shows how raw excess returns of 5% can be misleading, as the fund achieved its returns while taking less risk than the benchmark. Positive alpha indicates genuine value addition by the fund manager, while negative alpha suggests underperformance relative to the fund's risk level.
Despite recent Nifty underperformance attributed to poor performance from large private banks and IT stocks, fund managers are identifying opportunities in corrected large-cap valuations. As reported by TRUST Mutual Fund's Sandeep Bagla, the fund sees corrected large-cap valuations as a prime entry point for 2026, especially in banking and IT sectors. The fund's new Large & Mid Cap Fund aims to capture this shift by blending large-cap stability with mid-cap growth opportunities. Bagla highlights opportunities in megatrends including physical asset creation (manufacturing, data centers, defense), technological innovation, premiumization of consumption, and infrastructure development, anticipating steady economic growth driven by demographics.
For actively managed funds, consistently positive alpha over long periods suggests genuine value addition by fund managers rather than market timing. According to Value Research, this metric helps investors identify funds where managers have earned their fees through skill rather than riding market trends. The analysis recommends pairing alpha with other performance measures and considering consistency across market cycles when making investment decisions, as alpha performance can vary significantly over different market conditions. With corrected valuations in large-cap segments, fund managers are positioning for potential comeback in 2026, particularly in sectors like banking, IT, and infrastructure that show long-term growth potential.
