Relative returns refer to returns as compared to the market index of the country. The relative return is the difference between the absolute return and the Market Index return. The main object of the Mutual Fund to produce a return that beats the benchmark.
Relative return can also be known as alpha in the context of active portfolio management.
Because charged management fees on investors are high, therefore they expect a fund manager to reach higher returns as contrasted with the benchmark index.
Features of Relative Return
- It helps an investor in Decision Making.
- It helps in identifying the funds that are providing returns better than the Index.
- It can be measuring the performance of a fund in a bear and bullish market.
- The Relative returns are heavy reliance on market trends.
- The main goal of Relative Return is to provide the returns better than the benchmark index.
Use of Relative Return Analysis
If investors want to know the accurate time to move to a new mutual fund then the analysis of Relative Return will help them to opt for a better fund.
In other words, it helps an investor to understand that which funds are outperforming the market.
Formula to calculate Relative Return
Relative Return % = Absolute return% – Benchmark Index return%
For example, If the Nifty Index goes up by 18 % and a certain mutual fund goes up by 20% then the relative performance of the mutual fund 2 % (20%-18%).
Here, 20% is the Benchmark index return or Market index return and 18% is the absolute return.