What is Alpha?
A fund can beat its benchmark simply by taking on more market exposure (a beta above 1). Alpha strips that out - it’s the return left over after adjusting for how much market risk the fund actually took, the part that’s down to stock selection rather than just leverage to the market.
α = Rp − [Rf + β(Rm − Rf)]
Positive alpha means the fund beat what its beta alone would predict. Zero or negative alpha means it didn’t - even if the headline return looked fine.
Real comparison across 6 funds
CHART
3Y Alpha - 6 real funds
One fund in this set posted negative alpha - beating its own benchmark on paper isn't the same as generating real manager value-add.
Funds compared: Parag Parikh Flexi Cap · DSP Value · ICICI Prudential Value · SBI Focused · Parag Parikh ELSS Tax Saver · SBI Multicap
Reading the spread
Across these 6 funds, 3-year alpha runs from -0.50% (Parag Parikh ELSS Tax Saver) to 7.33% (SBI Focused), a gap of 7.83%. The middle value is 2.92%, with 3 of 6 above it. Taking higher as better, SBI Focused leads and Parag Parikh ELSS Tax Saver trails on this measure alone.
How to use it in practice
Alpha is the return a fund earned above what its market exposure alone would explain. Use it to judge whether a manager added anything beyond simply holding the market. Positive alpha, measured over a few years, is the case for paying an active fund’s higher fee. Check it next to excess return and the Information Ratio to see whether the outperformance was large, and also steady.
Common mistakes
Alpha depends on the benchmark chosen. Measure a mid cap fund against a large cap index and it will show alpha that has nothing to do with skill. It is also an estimate from past data, with noise around it, and it can change sign from one window to the next. Never read a single positive alpha as proof of skill; look for it across several periods.
Frequently asked questions
What does a positive alpha mean?
It means the fund returned more than its market exposure would have predicted, after accounting for risk. It is read as a sign that the manager’s choices added value, though only a consistent positive figure over several periods is convincing.
How is alpha different from excess return?
Excess return is the plain gap between fund and benchmark returns. Alpha also adjusts for how much market risk the fund took, so a fund with a low beta can have an alpha larger than its excess return.
Can alpha be negative?
Yes. A negative alpha means the fund returned less than its risk level would predict, which often reflects fees and poor stock selection. Many active funds have negative alpha over long periods, which is why an index fund is a reasonable alternative.
WHAT THIS MEANS FOR YOU Check alpha before crediting a manager for a fund’s outperformance - a high beta alone can produce a good-looking return in a rising market with zero actual skill involved.
METHODOLOGY Computed over a trailing 3-year window as of 2026-08-31, using each fund’s own beta and benchmark. Data: Punji risk analytics. Not investment advice.