Mutual Fund Selection - Information Ratio

Download Tax Saving Mutual Fund Application Forms

Invest In Tax Saving Mutual Funds Online

Buy Gold Mutual Funds

Leave a missed Call on

94 8300 8300

 

Information Ratio

Information ratio is used to measure the performance of an active fund manager. It is expressed as the active return or alpha (α) of a portfolio divided by the tracking error. Active return or alpha return is the excess return generated by the fund over its benchmark. Tracking error measures the standard deviation of the alpha return.

Information ratio= (R-Rb)/σ= α/ω

Where R= return on the portfolio, Rb= Return on the benchmark σ= Standard deviation of the alpha return, α= alpha of the portfolio and ω= Tracking error

Information ratio is in other words nothing but risk adjusted alpha.

The ratio is similar to the Sharpe ratio, the difference being that instead of using risk free rate, the portfolio return is compared with the benchmark return here. Information ratio is a highly useful tool when one wants to evaluate the performance of an active fund manager. Alpha is the indicator of the stock picking ability of a fund manager. The ratio finds out the incremental return generated by the fund manager for the incremental risk undertaken by the manager to deliver the alpha returns. The higher the active return for the incremental risk undertaken over the benchmark portfolio risk, higher is the stock picking ability of a fund manager. Higher information ratio is therefore associated with superior skills of an active fund manager.

When looking at actively managed equity funds, we always look for alpha - the excess return over benchmark that the fund manager has produced. Alpha is widely regarded as the best metric to measure outperformance. In the Information ratio, we consider not only the alpha but also the degree of variability in the alpha that this fund manager has produced from time to time. If you find one fund with a higher overall alpha but a very large degree of fluctuations in the period-on-period alpha generated by the fund manager, it may just score lower in the Information ratio than another fund with a lower overall alpha but a more stable set of alpha numbers generated period-on-period by the other fund.

Information ratio is in other words nothing but risk adjusted alpha. In our market, since the vast majority of equity funds are actively managed and most of the money collected by fund houses is in various varieties of diversified equity funds, generating alpha has always been the focus of the fund managers. When alpha is a core focus area, it probably follows that the Information ratio should become increasingly a core focus area for analysts and advisors.

 

 

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

 

 

Leave a missed Call on 94 8300 8300

 

Leave your comment with mail ID and we will answer them

OR

You can write back to us at

PrajnaCapital [at] Gmail [dot] Com

 

---------------------------------------------

Invest Mutual Funds Online

Invest Any Mutual Fund Online

 

Download Mutual Fund Application Forms from all AMCs

Download Mutual Any Fund Application Forms

---------------------------------------------

 

Best Performing Mutual Funds

1. Largecap Funds             Invest Online
1. DSP BlackRock Top 100 Fund
2. ICICI Prudential Focused Blue Chip Fund
3. Franklin India Bluechip
4. ICICI Prudential Top 100 Fund

B. Large and Midcap Funds         Invest Online

1. ICICI Prudential Dynamic Plan
2. HDFC Top 200 Fund
3. UTI Dividend Yield Fund
4. Birla Sun Life Front Line Equity Fund
5. Franklin India Prima

C. Mid and SmallCap Funds          Invest Online

1. Reliance Equity Opportunities Fund
2. DSP BlackRock Small & Midcap Fund
3. Sundaram Select Midcap
4. IDFC Premier Equity Fund
5. Birla Sun Life Dividend Yield Plus
6. SBI Emerging Businesses Fund
7. HDFC Mid-Cap Opportunities Fund
8. ICICI Prudential Discovery Fund

D. Small and MicroCap Funds   Invest Online

1. DSP BlackRock MicroCap Fund

2.       Franklin India Smaller Companies

E. Sector Funds          Invest Online

1. Reliance Banking Fund
2. Reliance Banking Fund
3. ICICI Prudential Banking and Financial Services Fund

F. Tax Saver Mutual Funds      Invest Online

1. ICICI Prudential Tax Plan

2. HDFC Taxsaver

3. DSP BlackRock Tax Saver Fund
4. Reliance Tax Saver (ELSS) Fund

G. Gold Mutual Funds        Invest Online

1. Relaince Gold Savings Fund
2. ICICI Prudential Regular Gold Savings Fund
3. HDFC Gold Fund
4. Birla Sun Life Gold

H. International funds         Invest Online

1. Birla Sun Life International Equity Plan A

2. DSP BlackRock US Flexible Equity

3. FT India Feeder Franklin US Opportunities

4. ICICI Prudential US Bluechip Equity

5. Motilal Oswal MOSt Shares NASDAQ-100 ETF