What is R-Squared?
R-Squared comes from regressing the fund’s returns against its benchmark’s returns, and reports what fraction of the fund’s return variation that regression explains - from 0 (the benchmark explains none of it) to 1 (the benchmark explains all of it). It’s a caveat check on every other benchmark-relative metric on this page: Beta, Alpha, and Treynor Ratio only mean what they claim to mean if R-Squared is reasonably high - a low R-Squared means the fund’s moves are driven by something the chosen benchmark doesn’t capture well.
R² = Correlation(Rp, Rb)²
Ranges 0 to 1. Closer to 1 means the benchmark explains most of the fund’s movement; closer to 0 means it doesn’t - not “better” or “worse” on its own, just a measure of how benchmark-relative the fund’s behavior is.
Real comparison across 6 funds
CHART
3Y R-Squared - 6 real funds
Same 3-year window as the Sharpe/Sortino comparisons, each against its own stated benchmark.
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, R-squared runs from 0.64 (DSP Value) to 0.86 (SBI Multicap), a gap of 0.23. The middle value is 0.76, with 3 of 6 above it. Neither end is better or worse in itself; the number describes how a fund behaves, and what matters is whether that matches what you want.
How to use it in practice
R-squared tells you how much of a fund’s movement is explained by its benchmark, on a scale of 0 to 1. A value near 1 means the fund moves almost in step with the index, so its beta and alpha are reliable. A low value means the benchmark is a poor yardstick for the fund, and those other numbers should be trusted less.
Common mistakes
A high R-squared does not mean the fund is good, only that it tracks the index closely, which is expected of an index fund and may be a warning in an active fund charging active fees. A low R-squared does not mean the fund is bad either; it may simply be measured against the wrong benchmark. Use it as a reliability check on the other metrics.
Frequently asked questions
What does an R-squared of 0.9 mean?
It means 90% of the fund’s movement can be explained by its benchmark. The remaining 10% comes from the fund’s own choices or other factors.
Is a high R-squared good or bad?
It depends on the fund type. For an index fund, a value near 1 is expected and good. For an active fund, a very high value may mean it is close to the index despite charging active fees.
How does R-squared relate to beta and alpha?
It tells you how reliable they are. When R-squared is low, beta and alpha measured against that benchmark are less meaningful.
WHAT THIS MEANS FOR YOU If a fund’s R-Squared against its stated benchmark is low, its Beta and Alpha versus that same benchmark are less trustworthy - the fund is behaving in ways the benchmark doesn’t track well, often because the fund’s actual holdings differ meaningfully from what the benchmark represents.
METHODOLOGY Computed over a trailing 3-year window as of 2026-08-31, using each fund’s own benchmark. Data: Punji risk analytics. Not investment advice.