Market regulator SEBI 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 (IR) is a measurement of portfolio returns beyond the returns of a benchmark, usually an index, compared to the volatility of those returns.
- The benchmark used is typically an index that represents the market or a particular sector or industry.
- The information ratio is often used as a measure of a portfolio manager’s level of skill and ability to generate excess returns relative to a benchmark, but it also attempts to identify the consistency of the performance by incorporating a tracking error, or standard deviation component into the calculation.