A Mutual fund is an investment vehicle that is made up of a pool of funds collected from

many investors for the purpose of investing in securities such as stocks, bonds, money market
instruments and similar assets. Mutual funds are operated by money managers, who invest the
fund's capital and attempt to produce capital gains and income for the fund's investors.
They are a diversified investment product that makes it possible for investors to own a portion
of a larger portfolio of shares managed by a professional manager. Mutual funds offer small
investors opportunity to own a portion of a professionally managed diversified portfolio
which would have been difficult to create or own with a small amount of capital.
Beta is a variable which shows the relationship between the rate of return and the market
premium rate. The beta value is the slope of the line when this relation is graphed. The
procedure to find beta is the same as finding the slope of a line. Beta can be calculated when
the following variables are known: required rate of return, the risk-free rate and the market
premium rate.
When calculating for the beta-coefficient of mutual funds, investors use statistical regression
analysis to calculate the beta coefficient or beta of a mutual fund portfolio. Investors use beta
as a measure of risk and volatility. Investors also use the beta coefficient as a performance
measure, comparing the mutual funds performance against the performance of other
securities.
Investors typically give the stock market as a whole a beta value of one. Investors calculate
beta values for a mutual fund by examining the funds historic price movements over a period,
usually three to five years. The beta value of the mutual fund portfolio is either less than or
greater than one. Mutual fund portfolios with a beta value greater than one means that it has
the potential to earn higher returns than the overall stock market. A value greater than one also
means the fund possesses a potentially higher investment risk. A mutual fund with a beta
value of less than one means that it has the potential to earn lower returns than the overall
stock market, but can also mean that it possesses a lower investment risk.
A beta value measures the price movements of the mutual fund in relation to price movements
of the overall stock market. It also measures how a mutual funds value reacts to changes in
the stock market. If a mutual fund has a beta value of more than one, then investors typically
consider it more volatile, as compared to the stock market as a whole, than a mutual fund with
a beta value of less than one. Beta values are a type of measure of a funds volatility only
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compared to the stock market. It does not directly measure the volatility of the mutual fund
itself.
Investors measure the volatility of the mutual fund itself by using the funds standard
deviation over a short period. When calculating the standard deviation, investors compare the
rate of return of the fund over a period, generally three to five years of the fund. They then
compare this to the funds long-term average rate of return. The more the current rate of return
deviates from the long-term average, the more volatile the fund. The less it deviates, the less
volatile the fund. In conclusion, beta coefficient is essential to investors when making
comparisons between mutual funds because it offers the opportunity to assess or ascertain the
possible risks and return of mutual funds.