The information ratio is important in evaluating mutual funds because it measures how well a fund performs compared to a benchmark, considering the risk taken. It shows if a fund manager is delivering consistent returns above the benchmark without taking excessive risk. A higher information ratio means better risk-adjusted performance, helping investors choose the right mutual fund.
What is the Information Ratio?
The information ratio compares a mutual fund’s returns beyond its benchmark to the risk taken to achieve those returns. It is calculated by dividing the difference in returns by the tracking error (volatility of excess returns). This helps investors see how consistently a fund outperforms its benchmark.
Why is Information Ratio Important for Investors?
It helps investors understand if a fund is adding value after accounting for risk. A high information ratio means the fund is good at generating returns consistently over the benchmark. This is important because just looking at returns alone can be misleading if a fund takes very high risks. Investors use this ratio to pick funds that manage risk well while giving better returns.
How is the Information Ratio Different from Sharpe Ratio?
While the Sharpe ratio measures returns against risk-free returns, the information ratio measures returns against a specific benchmark. Information ratio focuses on how well the fund beats its benchmark considering the risk taken. This makes it more useful for comparing active mutual funds against their index.
What is a Good Information Ratio Value?
A value above 0.5 is generally considered good, showing the fund consistently outperforms the benchmark. Values near or below zero indicate no consistent outperformance or that the fund is underperforming. Investors should look for funds with higher information ratios for better risk-adjusted returns.
How Can Indian Investors Use the Information Ratio?
Indian investors can use the information ratio to pick mutual funds that outperform popular benchmarks like Nifty 50 or Sensex. Many fund comparison websites and platforms like Angel One show this ratio for easy fund evaluation. Using this ratio helps investors make smarter choices for better long-term returns.
Contact Angel One Support at 7748000080 or 7771000860 for mutual fund investments, demat account opening, or trading queries.
© 2024 by Priya Sahu. All Rights Reserved.
