R-Squared

R-squared is a statistical measure that tells you how closely a mutual fund tracks its benchmark, such as the Nifty 50 or Nifty 500 TRI. It runs from 0 to 100, where 100 means the fund's ups and downs are fully explained by the index, and a low number means the fund moves to its own tune.

How to read it

Think of R-squared as a "how index-like is this fund?" gauge.

A value near 95-100 means the fund mirrors its benchmark very closely, this is what you expect from index funds and ETFs.

A value in the 70-90 range suggests an active fund that broadly follows the market but deviates meaningfully through stock selection.

A low R-squared means the benchmark you are comparing against may simply be the wrong yardstick.

Why it matters with Beta and Alpha

R-squared is most useful as a filter for other ratios. Beta and alpha (a fund's market-relative volatility and its outperformance) are only trustworthy when R-squared is high. If a fund's R-squared against the Nifty is low, its beta and alpha versus the Nifty are statistically unreliable, you are comparing it to the wrong index.

In India

You will find R-squared on factsheets of most large fund houses and on research portals like Value Research and Morningstar India. It is especially handy for two checks.

First, spotting closet indexers: an actively managed equity fund charging a higher expense ratio but showing an R-squared near 99 is essentially hugging the index, you may be paying active fees for near-passive results. In that case a low-cost index fund could do the same job cheaper.

Second, choosing the right benchmark: a small-cap or thematic fund will naturally show a lower R-squared against the Nifty 50, and that is fine, it should be judged against a more relevant index.

The practical takeaway: use R-squared not to pick a fund directly, but to sanity-check the benchmark and to ensure other risk numbers are meaningful before you act on them.