Sebi’s new risk-adjusted return mandate: What it means for DIY investors

livemint.com:

Subscribe to enjoy similar stories. The Securities and Exchange Board of India (Sebi) had released a consultation paper in June last year, emphasizing the importance of Risk-Adjusted Return (RAR) in mutual fund investments. This was followed by a circular on 17 January, mandating mutual funds to disclose the Information Ratio (IR) of each scheme portfolio on their websites daily, along with returns.

The rule takes effect three months from its issue date. While this initiative aims to help investors make more informed decisions, a key question remains: will it truly benefit DIY (do-it-yourself) investors—those who manage their own portfolios without professional advisors—by enabling them to assess risk effectively and select the right funds? Read this | Sebi's 2025 Shake-Up: New rules for Mutual Fund Lite, derivatives, and finfluencers on the horizon Two mutual fund schemes can generate identical returns yet offer vastly different experiences due to volatility, a widely accepted measure of risk. Evaluating returns without considering the risk taken to achieve them can be misleading.

Several metrics exist to measure RAR, including the Sharpe Ratio, Treynor Ratio, and Sortino Ratio. However, Sebi has mandated the Information Ratio as the standardized metric for fund comparison. The IR measures how much excess return a fund generates over its benchmark, adjusted for volatility.

It is calculated as the difference between the portfolio return and the benchmark return, divided by the tracking error. The tracking error represents the standard deviation of the excess return. A higher IR indicates a fund manager’s ability to deliver consistent excess returns relative to the benchmark.