a time, investors would focus on a mutual fund's performance when
what fund to buy. However, while that is an important factor to
believe it is also important for investors to examine other factors,
those which indicate an investment's risk level. In this article, we
why the Sharpe ratio and the Risk-return ratio are good proxies to do
Is A Sharpe Ratio?
Sharpe Ratio measures an investment's excess return per unit of risk.
excess return is calculated by finding the investment's return in
that from a risk-free asset. The risk free asset in India is the 10
government bond. This ‘excess return' is then divided by the
level, which can be measured by the standard deviation of the returns.
Higher The Shape Ratio, The Better The
Sharpe Ratio can be used to compare the performance of a portfolio or
manager, relative to their peers. When the Sharpe ratio is used to rank
performance of a fund manager, it indicates the excess return that the
manager can deliver to investors per unit of risk that the fund manager
the higher the Sharpe ratio, the better the investment's performance.
investors should compare the Sharpe ratio of mutual funds which have a
investment objective, and invest in the same sector. For example, from
numerous diversified equity funds distributed on our platform,
compare the Sharpe ratio of these funds to find which one can provide
is a Risk-return Ratio?
Risk Return ratio is a simpler version of
the Sharpe ratio. It measures the return per unit of risk, but does not
into account the excess return from an investment's return above that
risk-free instrument. Therefore, the Risk-return ratio takes the
return, and its volatility (standard deviation) to measure the
speaking, the Risk-return ratio is similar to the Sharpe ratio. Both of
are used to measure the return of a mutual fund for every unit of risk
Investors can compare the two ratios for the mutual funds which are
the same asset class or sector. When a mutual fund's Shape ratio and
Return ratio are higher than those of its peers, this means that the
a better return for a given unit of risk.
Sharpe Ratio and Risk Return Ratio are
measures that are commonly used for comparing the performance of mutual
or portfolios, and the way that the fund manager manages risk and
as the ratios provide an indication of the level of risk borne by the
manager in the process of running the fund or portfolio. We believe
that a good
fund manager should be able to deliver good returns, but must also
volatility of the fund effectively. In other words, a good fund should
better-than-average Sharpe ratio or Risk Return ratio. Information for
ratios can be found in the Fund Selector; investors
refer to our fund factsheets for the Sharpe Ratios of specific funds.