Overview
The correlation matrix shows how closely the daily returns of different funds move together. A high correlation means two funds tend to go up and down on the same days. A low or negative correlation means they move independently - which is valuable for diversification.
Formula
Where R_A and R_B are daily returns of Fund A and Fund B. The result is always between -1 and +1.
Computed using DuckDB's built-in CORR() aggregate function, which computes Pearson's correlation coefficient in a single pass over paired daily returns. Only trading days where both funds have valid returns are included (INNER JOIN on date).
How to Interpret
- +0.8 to +1.0 (dark green): Very high correlation. Funds move almost identically. Adding both to a portfolio provides little diversification.
- +0.5 to +0.8 (light green): Moderate to high correlation. Common among funds in the same category (e.g., two large-cap funds).
- 0 to +0.5 (white/neutral): Low correlation. Good diversification potential.
- -0.5 to 0 (light red): Slight negative correlation. Excellent diversification - when one falls, the other tends to hold or rise.
- -1.0 to -0.5 (dark red): Strong negative correlation. Rare in equity mutual funds. Typically only seen between equity and inverse/hedge instruments.
Evaluation Period
Correlation is computed over the selected period (1Y, 3Y, 5Y, 10Y, Full, or Custom dates). Shorter periods show recent co-movement; longer periods give more stable estimates. Correlation can change over time - two funds that were uncorrelated in 2020 may become highly correlated in 2025 if market conditions change.
Example: 3 Funds
| Large Cap A | Mid Cap B | Small Cap C | |
|---|---|---|---|
| Large Cap A | 1.00 | 0.85 | 0.62 |
| Mid Cap B | 0.85 | 1.00 | 0.78 |
| Small Cap C | 0.62 | 0.78 | 1.00 |
Large Cap A and Mid Cap B (0.85) move very similarly - holding both adds little diversification. Small Cap C has lower correlation with Large Cap A (0.62) - a better diversification pairing.
Important Notes
- Uses daily returns (percentage change in NAV), not NAV levels.
- Minimum 30 overlapping trading days required per pair.
- Benchmark index is always included for reference.
- Handles missing dates via INNER JOIN - only days where both funds traded are used.
- All Indian mutual funds share the same trading calendar (AMFI), so date alignment is rarely an issue. Index data from Yahoo may have minor gaps.
- Correlation does not imply causation - two funds may be correlated because they hold similar stocks, not because one drives the other.
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