Sebi has put the spotlight on risk in mutual funds again. It has proposed that all mutual funds mandatorily disclose risk-adjusted return, not just the return. This risk-adjusted return is to be recorded in the form of ‘information ratio’. The information ratio essentially measures how much excess return a fund generates relative to the excess risk it takes, compared to its benchmark. It’s calculated by dividing the active return (fund’s return, minus its benchmark index) by the tracking error (standard deviation of active return). A higher ratio indicates better risk-adjusted performance, reflecting how well a fund performs relative to its benchmark while considering volatility.
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