Investors often look at returns when selecting a mutual fund. However, a fund’s performance is not just about how much it earned, it is also about how much value the fund manager created over and above the benchmark. This is where alpha comes into the picture.
A higher alpha generally indicates that a fund has delivered returns beyond what would have been expected based on the risk it took relative to its benchmark. For investors seeking actively managed equity funds, alpha is one of the most closely watched performance indicators.
A Value Research screening of active equity mutual funds shows seven schemes that currently have an alpha of more than 10%. While that may look impressive at first glance, experts often caution investors against using alpha as the sole criterion for fund selection.
Before looking at the funds, it is important to understand what alpha exactly means.
What is alpha in mutual funds?
Alpha measures a fund’s excess return compared to its benchmark after adjusting for risk. In simple terms, if a benchmark index delivers a return of 12% and a fund generates 15%, the fund has outperformed the benchmark. Alpha attempts to quantify this outperformance after considering market risk.
A positive alpha suggests that the fund manager has added value through stock selection and portfolio management. A negative alpha suggests underperformance relative to the benchmark.
The higher the alpha, the greater the excess return generated by the fund over its benchmark.
Three important facts investors should know about alpha
1. Two funds can have the same returns but different alpha
Suppose Fund A and Fund B both deliver 15% annual returns.
However, Fund A’s benchmark generated 10%, while Fund B’s benchmark delivered 14%.
In this case, Fund A has created significantly more excess return than Fund B, resulting in a higher alpha despite identical fund returns.
This is why looking only at returns can sometimes be misleading.
2. Alpha is backward-looking
Alpha is calculated using historical performance.
A fund that has generated a high alpha over the past three years is not guaranteed to repeat the same performance in the future. Market cycles, fund manager decisions, sector trends and economic conditions can all influence future outcomes.
Therefore, investors should treat alpha as a measure of past fund-management effectiveness rather than a prediction of future returns.
3. Negative alpha does not mean negative returns
Many investors wrongly assume that a negative alpha means they have lost money.
Not necessarily.
For example, if a benchmark rises 20% and a fund rises 17%, the investor still earns a positive return. However, because the fund lagged the benchmark, its alpha turns negative.
In other words, negative alpha indicates underperformance relative to the benchmark — not necessarily an absolute loss.
7 equity mutual funds with alpha above 10%
| Fund | Alpha (%) |
| Franklin India Technology Fund (Direct) | 11.07 |
| DSP Natural Resources and New Energy Fund (Direct) | 10.93 |
| Invesco India Financial Services Fund (Direct) | 10.71 |
| Quant Value Fund (Direct) | 10.59 |
| Motilal Oswal Large and Midcap Fund (Direct) | 10.49 |
| Bandhan Small Cap Fund (Direct) | 10.31 |
| Franklin India Opportunities Fund (Direct) | 10.01 |
(Data: Value Research; as on May 31, 2026)
A closer look at the funds
Among the seven funds, there is meaningful diversity in size, age and mandate — though all carry a “Very High” riskometer rating. Three of the seven manage assets of over Rs 8,000 crore, with Bandhan Small Cap Fund the largest at over Rs 25,000 crore. Two funds — Franklin India Technology Fund and DSP Natural Resources and New Energy Fund — were both launched in January 2013, making them among the more seasoned schemes on the list.
Franklin India Technology Fund (Direct)
Launched in January 2013, the fund uses the BSE Teck TRI as its benchmark. It has generated a return of 16.93% since launch and manages assets worth Rs 1,648 crore. Its alpha of 11.07% is the highest among the seven funds.
Investors should note that technology-focused funds are sectoral in nature and can experience sharp swings depending on trends in the technology sector. The fund’s riskometer is classified as “Very High”.
DSP Natural Resources and New Energy Fund (Direct)
Also launched in January 2013, this thematic fund invests in sectors linked to natural resources and energy. It has delivered a return of 18% since launch and manages assets worth Rs 2,343 crore.
With an alpha of 10.93%, it combines benchmark outperformance with some of the strongest risk-adjusted metrics among the seven — a point worth revisiting in the risk section below.
Invesco India Financial Services Fund (Direct)
The fund invests in the financial services sector, using the Nifty Financial Services TRI as its benchmark. It has generated a return of 15.66% since launch and currently manages Rs 1,673 crore in assets.
Its alpha of 10.71% reflects meaningful benchmark outperformance, with relatively lower volatility compared to several peers in this list.
Quant Value Fund (Direct)
Launched in November 2021, this is one of the newer schemes in the list. It has generated a return of 21.62% since launch and manages assets worth Rs 1,756 crore.
The fund’s alpha of 10.59% highlights strong benchmark outperformance. However, investors should note that it also carries the highest standard deviation among the seven funds, indicating greater return volatility.
Motilal Oswal Large and Midcap Fund (Direct)
This fund has delivered a return of 22.5% since launch and has amassed assets worth Rs 16,777 crore, making it one of the larger schemes in this group.
With an alpha of 10.49%, the scheme has generated substantial excess returns over its benchmark. However, it also exhibits relatively higher market sensitivity, with a beta of 1.19, compared to some peers.
Bandhan Small Cap Fund (Direct)
The Bandhan Small Cap Fund has delivered 30.47% since launch, the highest since-launch return among the seven. It manages over Rs 25,000 crore in assets and has an alpha of 10.31%.
Being a small-cap fund, investors should expect higher volatility and plan for longer investment horizons.
Franklin India Opportunities Fund (Direct)
This diversified equity fund has generated a return of 17.08% since launch and manages assets worth Rs 8,535 crore.
Its alpha of 10.01% indicates consistent benchmark outperformance while maintaining a diversified portfolio approach — and its risk metrics, including a Sharpe ratio of 1.04, are broadly in line with the stronger performers in this list.
Alpha alone does not tell the full story
A fund may have a high alpha, but investors should also evaluate how much risk was taken to generate that excess return. Returns and alpha, after all, only tell part of the story.
This is where metrics such as standard deviation, Sharpe ratio, Sortino ratio and beta become useful. As a starting point: a Sharpe ratio above 1.0 is generally considered good, indicating the fund is generating more than one unit of return for every unit of risk taken.
Risk analysis of the seven funds
| Fund | Riskometer | Standard Deviation | Sharpe Ratio | Sortino Ratio | Beta |
| Franklin India Technology Fund (Direct) | Very High | 18.22 | 0.5 | 0.73 | 0.75 |
| DSP Natural Resources and New Energy Fund (Direct) | Very High | 15.84 | 1.17 | 1.94 | 0.63 |
| Invesco India Financial Services Fund (Direct) | Very High | 15.31 | 0.86 | 1.1 | 0.84 |
| Quant Value Fund (Direct) | Very High | 21.64 | 0.94 | 1.85 | 1.23 |
| Motilal Oswal Large and Midcap Fund (Direct) | Very High | 21.37 | 0.9 | 1.14 | 1.19 |
| Bandhan Small Cap Fund (Direct) | Very High | 20.89 | 1.1 | 1.76 | 0.92 |
| Franklin India Opportunities Fund (Direct) | Very High | 17.69 | 1.04 | 1.38 | 1.06 |
(Data: Value Research)
Standard deviation: Measuring volatility
Standard deviation measures how widely a fund’s returns fluctuate around its average return. A higher figure generally indicates greater volatility.
Among the seven funds, Invesco India Financial Services Fund and DSP Natural Resources and New Energy Fund have the lowest standard deviation values, suggesting comparatively lower volatility. Quant Value Fund and Motilal Oswal Large and Midcap Fund show the highest levels.
Sharpe ratio: Return generated for every unit of risk
The Sharpe ratio measures how efficiently a fund has rewarded investors for the total risk taken.
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 comfortably cross the 1.0 threshold, suggesting relatively better risk-adjusted returns. Franklin India Technology Fund, with a Sharpe ratio of 0.50, lags noticeably on this measure despite having the highest alpha.
Sortino ratio: Focus on downside risk
Unlike the Sharpe ratio, the Sortino ratio focuses only on harmful volatility — that is, downside fluctuations — rather than total volatility. This makes it a more targeted measure of how well a fund protects investors in difficult periods.
DSP Natural Resources and New Energy Fund again stands out with the highest Sortino ratio of 1.94, followed by Quant Value Fund at 1.85 and Bandhan
Small Cap Fund at 1.76. A higher Sortino ratio generally indicates better downside-risk management.
Beta: Sensitivity to market movements
Beta measures how much a fund tends to move relative to the broader market. A beta below 1 indicates lower sensitivity than the benchmark; a beta above 1 suggests larger movements in either direction.
DSP Natural Resources and New Energy Fund has the lowest beta at 0.63, indicating relatively lower market sensitivity. Quant Value Fund and Motilal Oswal Large and Midcap Fund, with betas of 1.23 and 1.19 respectively, are more responsive to market swings — meaning they tend to amplify both gains and losses.
Riskometer: A common warning across all seven funds
Before reviewing the individual risk metrics, it is worth noting one feature that applies uniformly across this entire list: all seven funds carry a “Very High” risk rating on the riskometer.
This means investors should be prepared for significant fluctuations in returns and NAV, particularly during periods of market stress. The list spans sectoral, thematic, small-cap and aggressive equity strategies — all of which can experience sharp short-term volatility.
Investor caution: Do not chase alpha blindly
A high alpha can be an attractive indicator, but it should never be viewed in isolation.
A fund may generate a high alpha because it took concentrated sector bets, invested heavily in high-risk stocks or benefited from a favourable market cycle. Such performance may not necessarily be sustainable over the long term.
Investors should remember that alpha is a historical measure. It tells you what a fund manager achieved in the past, not what the fund will deliver in the future.
Before investing, it is important to evaluate multiple factors, including: Investment objective and category suitability; Benchmark consistency; Portfolio quality and concentration; Fund manager track record; Volatility measures and risk-adjusted return metrics; and Your own investment horizon and risk tolerance.
For most long-term investors, the ideal approach is to use alpha as one of several evaluation tools — not as the deciding factor.
Note: All risk measures have been calculated using calendar month returns for the last three years. Data as on May 31, 2026.
Disclaimer: The mutual fund schemes discussed in this article have been selected solely on the basis of alpha exceeding 10% as per data available on May 31, 2026. Alpha is a historical performance metric and should not be construed as an indicator or guarantee of future returns. A high alpha may result from favourable market conditions, sector concentration, stock-specific bets, or a particular investment cycle that may not persist in the future.
Investors should evaluate a fund’s overall portfolio quality, investment objective, risk profile, benchmark consistency, expense ratio, fund manager track record, Sharpe ratio, Sortino ratio, beta, standard deviation, and suitability to their own financial goals before investing. Past performance is not indicative of future results. Mutual fund investments are subject to market risks. Read all scheme-related documents carefully before investing.