What is R-squared in a mutual fund factsheet? How is it related to the mutual fund’s performance?

Let's understand what is R-Squared in a mutual fund factsheet.

1. R-squared is a statistical measure that indicates how closely a mutual fund’s performance correlates with a benchmark index.

2. The value of R-squared ranges from 0 to 100.


3. High R-squared (70-100%) indicates that the fund’s performance closely follows the benchmark index.

4. Low R-squared (0-40%) indicates that the fund’s performance does not closely follow the benchmark index.

5. 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.

Content courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.