High return, lower volatility: 5 equity mutual funds that stand out on risk-adjusted performance – Money News

To identify funds that have combined strong benchmark outperformance with relatively moderate volatility, we screened active equity mutual funds using Value Research data as of May 31, 2026. The BSE 500 TRI was used as the common benchmark, as it serves as the broadest representation of the Indian equity market and is the declared benchmark for all five funds. Only funds with a standard deviation below 15 and alpha above 5 were considered.

Funds with alpha above 5 and standard deviation below 15

(Source: Value Research)

Why alpha matters

Alpha measures the excess return generated by a fund relative to what would be expected based on the level of market risk it has taken. Specifically, these calculations are based on Jensen’s alpha, which uses beta-adjusted expected returns to assess the value added by fund managers through stock selection, sector allocation, and portfolio construction.

A positive alpha suggests that a fund has outperformed its benchmark on a risk-adjusted basis. The higher the alpha, the greater the outperformance after accounting for market risk.

However, investors should avoid confusing high alpha with high returns. A fund can deliver strong positive returns and still have a low or even negative alpha if its benchmark performed even better. Similarly, a fund may have a high alpha without being the top-returning scheme in its category, because alpha measures relative outperformance, not absolute gains.

In short, alpha is a measure of risk-adjusted outperformance, not absolute returns.

Understanding standard deviation

Standard deviation is among the most commonly used measures of volatility. It indicates how much a fund’s returns have fluctuated around their average over a specific period. A lower standard deviation generally suggests relatively stable returns, while a higher standard deviation indicates greater fluctuations.

Investors should not assume that lower standard deviation is always better. There is no universal benchmark that defines what constitutes a good or bad standard deviation — the right interpretation depends on the fund category, investment style, market environment, and the investor’s risk tolerance.

For example, small-cap and thematic funds generally exhibit higher volatility than large-cap funds. This does not make them poor investments by default. In many cases, higher volatility is simply the price investors pay for potentially higher long-term returns.

Therefore, standard deviation should not be viewed in isolation. It is best evaluated alongside returns and other risk measures such as alpha, Sharpe ratio, Sortino ratio, and beta.

All five funds beat their benchmark over three years

(Source: Value Research)

How these funds compare with the benchmark on volatility

All five funds recorded lower standard deviation than the BSE 500 TRI during the period under review.

(Source: Value Research)

A closer look at the funds

DSP Value Fund Direct

DSP Value Fund Direct was the standout performer on the alpha parameter among the shortlisted schemes. It generated an alpha of 8.00 — nearly double the value-oriented category average of 4.19 — while keeping standard deviation at just 11.19%, well below both the benchmark (15.41%) and the category average (16.20%).

Over three years, the fund returned 19.77% annualised against the benchmark’s 13.13%, outperforming it by 6.64 percentage points. The combination of the lowest volatility and highest alpha in this screen makes it the most distinctive entry on a pure risk-adjusted basis.

ICICI Prudential India Opportunities Fund Direct

This fund delivered the highest three-year annualised return among the five, at 19.95%, beating the benchmark by 6.82 percentage points. Its long-term track record is equally consistent — it has generated annualised returns of 20.42% over five years and 19.99% over seven years.

An alpha of 7.00 and standard deviation of 13.34% (below the benchmark’s 15.41%) reflect sustained benchmark outperformance with moderate volatility.

HDFC Flexi Cap Fund Direct

HDFC Flexi Cap Fund Direct generated an annualised return of 17.81% over three years, ahead of both the BSE 500 TRI (13.13%) and the flexi-cap category average of 14.30%.

Its alpha of 5.28 is substantially higher than the category average of 1.39 — a meaningful gap that suggests active management has added real value here. Standard deviation of 13.11% was below both the benchmark and category norms.

HDFC Focused Fund Direct

Concentrated portfolios tend to attract investors seeking high conviction bets, but they also typically carry higher volatility due to limited diversification. HDFC Focused Fund Direct challenges that assumption.

Despite holding a restricted number of stocks, the fund maintained a standard deviation of 12.83% — lower than both the benchmark and the broader category average — while delivering a three-year annualised return of 17.47% and an alpha of 5.14.

ICICI Prudential Exports & Services Fund Direct

Sector-focused strategies are often associated with higher volatility, given their concentration in a single theme. Yet ICICI Prudential Exports & Services Fund Direct kept its standard deviation at 13.46% — below the benchmark’s 15.41% — while delivering an annualised return of 18.07% over three years.

An alpha of 5.01 reflects meaningful outperformance relative to the risk taken, an uncommon combination for a thematic fund.

Summing up…

The five funds identified in this screen combined alpha above 5 with standard deviation below 15, suggesting they have delivered meaningful benchmark outperformance while maintaining relatively moderate volatility over the last three years.

Investors should avoid drawing conclusions from any single metric. A high alpha does not mean the highest returns, just as a low standard deviation does not automatically make a fund the safer or better choice. These are tools for understanding how a fund generates returns — the quality and consistency of that process — rather than simple scorecards.

For investors evaluating these funds, the practical takeaway is this: look beyond the return number. A fund that has consistently beaten its benchmark while keeping volatility in check is demonstrating something more durable than a one-time return spike — it is showing evidence of repeatable, disciplined fund management.

Methodology: The analysis is based on Value Research data as of May 31, 2026. Only active equity mutual funds were considered. Funds were shortlisted based on alpha above 5 and standard deviation below 15. Alpha and standard deviation have been calculated using calendar month returns over the previous three years. The BSE 500 TRI is used as the common benchmark for all five funds.

Disclaimer: The mutual funds mentioned in this article have been shortlisted based on a screen using Value Research data as of May 31, 2026, with alpha above 5 and standard deviation below 15. The analysis is intended for informational and educational purposes only and should not be construed as investment advice or a recommendation to buy, sell, or hold any mutual fund. Past performance does not guarantee future returns. Investors should evaluate their financial goals, risk appetite, investment horizon, and consult a qualified financial advisor before making investment decisions. Mutual fund investments are subject to market risks. Read all scheme-related documents carefully before investing.