A measure of a fund's excess return compared to its benchmark index, after accounting for the level of risk taken.
Alpha represents the value added by the fund manager above and beyond what the benchmark index delivered for the same level of risk. A positive alpha means the manager outperformed; a negative alpha means the fund underperformed relative to its risk-adjusted benchmark.
If the Nifty 50 (the benchmark) returns 12% and a fund returns 15% with the same market risk, the fund has generated an alpha of approximately 3%. Alpha tells you how much of the return is skill versus just riding the market.
Alpha is derived from the Capital Asset Pricing Model (CAPM), which calculates expected return based on market exposure (beta).
If a fund's actual return exceeds its CAPM-predicted return, the excess is alpha.
Positive alpha indicates the manager added value through stock selection or timing.
Alpha is typically calculated over rolling 1-, 3-, and 5-year periods.
α = Rp − [Rf + β × (Rm − Rf)]