How is R-square related to the mutual fund’s performance
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Performance matrix
R-squared is a statistical measure that indicates how closely a mutual fund’s performance correlates with a benchmark index, according to the Centre for Investment Education and Learning (CIEL).
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Ratio range
The value of R-squared ranges from 0 to 100. This measures how closely a fund’s performance correlates with its benchmark index, expressed as a percentage.
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High value
A high R-squared (70-100%) indicates that the fund’s performance closely follows the benchmark index. In other words, it closely tracks the benchmark.
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Low value
Low R-squared (0-40%) indicates that the fund’s performance does not closely follow the benchmark index. In other words, it suggests more independent stock-picking by the fund manager.
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Suitability
A higher R-squared value might be suitable for index funds, while a lower R-squared value might be better for actively managed funds aiming to outperform the benchmark.