Mutual fund returns: Can recent Sebi mandate of disclosing risk-adjusted return help you identify the right mutual fund?
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.
Why is Sebi pushing for this disclosure now? Recent surges in investments in certain fund categories and schemes have raised concerns. Investors flock to funds with stellar recent returns, sometimes overlooking the associated high risks. Sebi aims to ensure investors consider not just performance, but also the risks involved. Risk-adjusted returns offer a more comprehensive view of fund performance, according to Sebi.
Table toppers may not always suit your risk
Some funds have taken higher risk to generate excess return.
Currently, not all fund houses disclose risk-adjusted returns. Sebi has observed that out of the 39 fund houses running equity schemes, 33 disclose the figure. Of the 36 fund houses running hybrid schemes, just 27 disclose their risk-adjusted return numbers. Further, AMCs do not follow a uniform methodology for calculating risk-adjusted return, as well as the frequency of NAVs used for the same. Sebi wants to standardise the metric in the form of information ratio.
Will this additional disclosure give you a better picture of the underlying risk? It is
