The Six Alphas That Matter In Investment Management

By Bhuvanaa Shreeram

“How much has your portfolio returned?” That is usually the first question people ask when evaluating a mutual fund, a portfolio management service (PMS) strategy, or an investment advisor. And it is a fair one—performance matters. But a more useful follow-up question would be: Where did that return come from? Was it the market? Was it luck? Or was it a set of smart, repeatable, controllable decisions that added up to meaningful alpha?

Let’s explore what is beating the market, generating alpha, and something far more powerful than simply outdoing the market: ‘Beating your own default outcome.’

The Power Of Alpha

Let’s say, you invest Rs 50,000 per month for 30 years in differently yielding assets or products. This is the kind of final corpus you may accumulate:

Annual Return        Final Corpus

10 per cent     Rs 11.4 crore

11 per cent     Rs 14.15 crore

12 per cent     Rs 17.65 crore

That 2 per cent alpha — between 10 per cent and 12 per cent — is worth Rs 6.25 crore.

This also signifies the power of compounding, the impact of a slightly better return over a long period of time. No one would want to give up the opportunity to earn this extra Rs 6.25 crore.

But here is the real question: Can you generate that extra 1–2 per cent alpha not through luck or timing, but through conscious choices?

The answer is yes. There are six sources of alpha.

Alpha #1: Lower Costs

This is the most predictable alpha you can generate. You do not need a forecast or trade aggressively either. You just need to choose smartly. Let us take two funds in the same category — large-cap equity. 

Fund Expense Ratio (TER) 10-Year XIRR

Mirae Asset Large Cap (Direct Plan) 0.53 per cent ~13.1 per cent

ICICI Prudential Bluechip (Regular Plan) 1.83 per cent ~12.1 per cent

The fund returns may look similar, but the cost difference is real. Over a 25–30 year investment horizon, a 1 per cent difference in cost can result in Rs 2–3 crore of lost alpha for a typical systematic investment plan (SIP).

Cost alpha comes from the following:

§ Choosing direct plans over regular ones

§ Avoiding high-cost, bundled insurance products

§ Minimising portfolio churn (which increases tax and transaction drag)

§ Being aware of exit loads and hidden fees

Remember that low cost is not low effort; it is high impact

Alpha #2: Better Asset Allocation

Most Indian investors are heavily allocated to real estate and fixed income. About 70-80 per cent of total net worth is often in illiquid or low-growth assets, and equity exposure remains less than 15–20 per cent, especially for older investors.

Let us see what this means in numbers:

Portfolio Mix

20 per cent equity / 80 per cent fixed income

Equity Return Fixed Income Return Weighted Return

12 per cent 6 per cent 7.2 per cent

50 per cent equity / 50 per cent fixed income

Equity Return Fixed Income Return Weighted Return

12 per cent 6 per cent 9.0 per cent

That 1.8 per cent improvement in return is pure asset allocation alpha. It is not about picking the best fund. It is about giving growth assets enough weight in your portfolio — especially for long-term goals.

Asset allocation alpha also shows up in:

§  Having liquidity when needed (to avoid selling equity in a downturn)

§  Matching investment horizon with asset risk

§  Using debt, gold, or cash as rebalancing tools

Your portfolio’s return is often decided before a single fund is picked.

Alpha #3: Better Product Selection

Within each asset class, the products you choose matter a lot. Here is a look at Value Research Online’s data (as of July 2024):

Fund Category: Large-Cap Average 10-Year XIRR

Top 10 funds ~12.8 per cent

Bottom 10 funds ~8.1 per cent

That is a 4.7 per cent spread — within the same category. So, even if your asset allocation is right, picking underperforming funds can erode return.

Product alpha comes from:

§  Choosing consistent performers with stable mandates

§  Understanding fund strategy and style

§  Avoiding unnecessary NFOs or theme-based funds

§  Comparing XIRRs across timeframes, not just short-term rankings

Remember that a good product inside the right asset class equals invisible alpha that builds silently over time.

Alpha #4: Better Timing (Market Timing)

Most advisors say: don’t time the market. We say: at least try not to get in at the worst time.

Let us take a simple historical example:

Investor A invested Rs 10 lakh in Nifty in December 2007 (market peak).

Investor B invested Rs 10 lakh in June 2008, post-correction.

Both held for 15 years.

Entry Date 15-Year CAGR Ending Value

Dec 2007 ~8.5 per cent Rs 34.1 lakh

June 2008 ~11.5 per cent Rs 49.6 lakh

That is Rs 15.5 lakh in timing alpha — just by waiting six months. No one gets it perfect. But you can:

§  Avoid investing large sums when valuations are overheated

§  Deploy more during deep corrections (March 2020, Covid crash)

§  Use basic valuation metrics or SIP step-ups to time entries

§  Even partial success here adds 1–2 per cent long-term Alpha.

Market timing is hard. But valuation awareness is very doable.

Alpha #5: Better Risk Management

What most people forget is that a 10 per cent loss needs an 11 per cent gain to recover, while a 33 per cent loss needs a 50 per cent gain. Elsewhere, a

A 50 per cent loss needs to double your money just to get back to zero

Risk management is not about fear. It is about longevity of capital. Especially for those in retirement, early drawdowns can permanently damage the sustainability of income.

Risk management alpha includes:

§  Diversification across assets

§  Managing sequence risk in retirement

§  Keeping emergency funds and near-term goal money safe

§  Avoiding over-concentration in single stocks, sectors, or real estate

It protects return by avoiding unrecoverable damage. Remember, that the best way to grow wealth is to not lose it too fast.

Alpha #6: Better Behaviour

The DALBAR 2023 Quantitative Analysis of Investor Behaviour lists the following data points

Metric Return

Average US Equity Fund ~9.6 per cent

Average Investor Return ~6.3 per cent

Now, you may ask what is the reason behind this gap? It is because investors switch, panic, pause SIPs, exit at lows and re-enter at highs. In India, too, redemptions peak when markets fall — and fresh inflows peak after rallies.

Behaviour alpha comes from:

§  Staying invested during down markets

§  Continuing SIPs through volatility

§  Avoiding return-chasing switches

§  Focusing on process, not predictions

But behaviour alpha is also about saving and investing enough. You cannot compound what you didn’t invest.

Rs 1.5 lakh/month at 8 per cent beats Rs 50,000/month at 15 per cent.
Because in the end, you spend corpus — not CAGR.

Real Alpha Is About Control

Not everything is in your hands. But these six things — cost, allocation, product, timing, behaviour, and risk — are.

And together, they can add 1-3 per cent extra return per year — which can change your financial future.

You may not get all six right. Even two–three one well can add crores to your long-term outcomes.

Final Word

Alpha is not just about beating the market. It is about building the future you want — faster, safer, and more confidently. Let others chase returns. You focus on the decisions that actually move the needle.

The author is a certified financial planner and co-founder and head of financial planning, House of Alpha Investment Advisors Private Limited

(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)