R-squared in mutual fund analysis

Mon, 18 May 2026 00:00:00 +0000

R-squared measures the proportion of a mutual fund’s return variability that is explained by its benchmark index, ranging from 0 to 100 (or 0 to 1). It indicates how closely the fund’s returns track the benchmark.

Interpretation

R-squared	Interpretation
85-100	Closely tracks benchmark (typical for index/closet-index funds)
70-85	Reasonable benchmark alignment
50-70	Moderate benchmark alignment
< 50	Weak benchmark alignment

For Indian mutual funds:

Index funds: R-squared typically 99+ (very close tracking).
Active large-cap funds: R-squared 85-95 typically.
Mid/small-cap funds: R-squared 70-90.
Sector/thematic funds: R-squared can be lower (60-80).

Use cases

Beta interpretation

R-squared determines whether beta is meaningful:

R-squared in mutual funds

Tue, 12 May 2026 00:00:00 +0000

R-squared (\(R^2\)), or the coefficient of determination, measures the proportion of a mutual fund’s return variance that is explained by variance in its benchmark index. It ranges from 0 to 1 (or 0 to 100 per cent). An R-squared of 1.0 (100 per cent) means all return variation is explained by the benchmark; an R-squared of 0 means the fund’s returns have no statistical relationship with the benchmark.

R-squared is an essential companion to beta because beta is only a reliable predictor of fund behaviour when R-squared is high. A fund with a calculated beta of 1.20 but an R-squared of 0.40 cannot be relied upon to behave in line with that beta, much of its movement is independent of the benchmark.

R-Squared on WebNotes

R-squared in mutual fund analysis

Interpretation

Use cases

Beta interpretation

R-squared in mutual funds