Is your mutual fund return silent on the risks?

The Securities and Exchange Board of India (SEBI) has mandated that mutual funds disclose risk-adjusted returns (RAR), specifically through the Information Ratio (IR), to enhance transparency and assist investors in making informed decisions. While compounded annual growth rate (CAGR) is a widely used measure to show the average growth rate of a fund, it does not account for risk or volatility.

Risk-adjusted returns offer a more comprehensive view by considering the consistency of returns relative to the risk taken. It considers volatility, ensuring investors understand whether a fund’s higher returns come with excessive risk. Higher risk-adjusted performance indicates that the fund manager is generating excess returns efficiently.

Also ReadRelax 20% pre-deposit rule for tax disputes under resolution, say experts

In contrast, CAGR measures absolute returns over time and does not consider the risk taken to achieve those returns. A fund with a higher CAGR may not always be better if it has extreme fluctuations.

“Considering the significance of volatility of performance in determining the suitability of mutual fund schemes, Information Ratio is an established financial ratio to measure the risk-adjusted return of any scheme portfolio,” the SEBI note said.

Risk profiles

Vivek Sharma, head, Investment, Estee Advisors, says while CAGR tells you how much an investment has grown on average, it does not reveal the risk taken to achieve those returns. “This can make it misleading for comparing funds with different risk profiles.”

Metrics like the Sharpe or Information Ratio combine both risk and return, offering a more comprehensive evaluation. These measures help determine whether a fund’s returns are worth the risk taken. The IR is calculated as portfolio return minus benchmark return divided by tracking error. Portfolio return is the return of the mutual fund. Benchmark return is the return of a relevant benchmark index. Tracking error measures the standard deviation of the difference between the portfolio and benchmark returns.

Identify high RAR funds

Investors must focus on consistency over high returns. Nirav Karkera, head, Research, Fisdom, says, a fund with a high CAGR but low RAR has delivered returns with high volatility, which is risky for long-term investing. “Instead, funds with a higher IR indicate consistent outperformance relative to their benchmark with controlled risk,” he says.

The RAR should be compared only among funds within the same category.

 » Read More

Related Articles

GCCs, IT companies dominate office space

Quarterly transactions in the office market reached a historic high of 28.2 million square feet in the January-March period, shows a Knight Frank report.  Global capability centres (GCCs) were the largest consumers of office space during the period, accounting for 44% of the total transaction volume.  A resurgence in demand from the third-party IT services

Gems and jewellery units to take a big hit

The reciprocal tariff of 27% will jack up customs duties faced by Indian exporters of studded and gold jewellery in the US to 32-34%, including 5.5-7% extant tariffs. Diamond products which currently do not have any tariffs, will cost US importers a 27% import duty. Sabyasachi Ray, Executive Director of the Gems & Jewellery Export

Some pain & some gain: India Inc counts the cost

Corporate India is gearing up for a challenging trade environment in the wake of the 27% reciprocal tariffs imposed by the US on Thursday. While the Trump administration has described the move as its moment of liberation, India Inc leaders feel there are some pain as well as some gain. From India’s perspective, key sectors

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Stay Connected

0FansLike
0FollowersFollow
0SubscribersSubscribe
- Advertisement -

Latest Articles

GCCs, IT companies dominate office space

Quarterly transactions in the office market reached a historic high of 28.2 million square feet in the January-March period, shows a Knight Frank report.  Global capability centres (GCCs) were the largest consumers of office space during the period, accounting for 44% of the total transaction volume.  A resurgence in demand from the third-party IT services

Gems and jewellery units to take a big hit

The reciprocal tariff of 27% will jack up customs duties faced by Indian exporters of studded and gold jewellery in the US to 32-34%, including 5.5-7% extant tariffs. Diamond products which currently do not have any tariffs, will cost US importers a 27% import duty. Sabyasachi Ray, Executive Director of the Gems & Jewellery Export

Some pain & some gain: India Inc counts the cost

Corporate India is gearing up for a challenging trade environment in the wake of the 27% reciprocal tariffs imposed by the US on Thursday. While the Trump administration has described the move as its moment of liberation, India Inc leaders feel there are some pain as well as some gain. From India’s perspective, key sectors

Dusit to expand presence in India, eyes emerging cities

Dusit International, a leading Thai hotel and property development company, on Thursday announced plans to expand its presence in India by launching its luxury and upper-midscale brands in key emerging markets.  The strategic expansion plan builds on the momentum of Dusit’s recent foray into the Indian market with the soft-opening of the contemporary and upscale

FMCG firms expect mixed show in Q4

The quarterly updates of fast-moving consumer goods (FMCG) companies, which has been released so far for the January-March 2025 period (Q4FY25), present a mixed picture of the sector at a time when urban demand has remained weak. Rural demand, in contrast, has been resilient and is expected to improve in the coming months. While Marico