The Information Ratio helps you know how well a mutual fund is performing compared to its benchmark, after adjusting for risk. A higher Information Ratio means the fund manager is doing a good job giving you better returns without taking extra risk. It is an important number to check when selecting a mutual fund.

What Is Information Ratio in Mutual Funds?

Information Ratio shows how much extra return a mutual fund gives over its benchmark, after adjusting for the extra risk taken. It helps you understand if the fund manager is adding real value through skill, or if the returns are just from taking more risk.

Why Is Information Ratio Important for Investors?

It tells you if a mutual fund is giving better returns compared to others with similar risk. A higher Information Ratio means the fund manager is doing a better job. It helps you choose a fund that is not just lucky, but has real performance through smart decisions.

What Is a Good Information Ratio?

A good Information Ratio is usually above 0.5. If it is above 1.0, it is considered excellent. This means the fund manager is adding high value through skillful investing. Ratios below 0.4 may not be that great and show that the extra return may not be worth the risk.

How Is Information Ratio Calculated?

Information Ratio is calculated by taking the difference between the mutual fund’s return and its benchmark’s return, then dividing it by the tracking error (how much the fund’s return varies from the benchmark). This shows how consistent and better the fund’s return is compared to the benchmark.

How Can You Use Information Ratio in Fund Selection?

When comparing mutual funds, check the Information Ratio along with returns and other ratios. If two funds give similar returns, the one with the higher Information Ratio is usually better. It means the fund gave better returns with better control of risk. This helps you choose smarter investments for long-term growth.