The Securities and Exchange Board of India has instructed mutual fund houses to disclose a very important risk-adjusted return measure called the Information Ratio for equity-oriented schemes. The step shall help ensure that the investors get to have a more distinct view of the performance of any scheme by factoring in risk and return.
SEBI, in a circular on January 17, said a mutual fund should disclose IR of the scheme portfolio along with its performance disclosures as published on websites, updated regularly every day, amongst other directions. The Association of Mutual Funds in India will similarly organize such disclosures and have these disclosures made available together in a consistent and downloadable form in the public domain.
What is the Information Ratio?
The Information Ratio measures risk-adjusted returns and is calculated using the following formula:
IR = (Portfolio Returns – Benchmark Returns) / Standard Deviation of Excess Returns
Key Aspects of IR Calculation:
- Excess Returns: Difference between portfolio returns and benchmark returns.
- Benchmark: The Tier 1 benchmark currently used by equity-oriented mutual fund schemes.
- Volatility (Standard Deviation): Derived from daily return values.
- Daily Portfolio Returns: Calculated using an arithmetic function.
Why is IR Important?
SEBI explained that IR is an established financial metric for assessing a portfolio manager’s ability to generate returns in excess of the benchmark. It also measures the persistence of performance, factoring in volatility, and thus is a useful tool for investors in determining the suitability of mutual fund schemes.
The increased transparency will, to some extent, help investors make more informed decisions and hold fund managers accountable.
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Source: Moneycontrol
News Desk
