Sebi Information Ratio: Daily MF Disclosure Explained
Why in the news
Sebi ordered daily publication of the Information Ratio (IR) for every mutual fund so do-it-yourself investors can judge risk-adjusted returns. Questions remain on its practical value.
About the Information Ratio
- Measures a fund’s excess return over its benchmark relative to volatility.
- Formula: IR = (Portfolio return – Benchmark return) / Tracking error.
- A higher IR implies a manager delivers more consistent outperformance.
- AMFI collects AMC figures, standardises them and shares them in downloadable format.
Advantages
- Easier comparison of funds by risk and return.
- Shows which managers beat the benchmark consistently.
- Gives a standard yardstick beyond plain returns.
Limitations
- Meaningless in isolation; useful only against other funds.
- Varies over time, so unsuited to long-run comparison.
- Funds with different benchmarks cannot be compared.
- A fund can post a positive IR in a falling market by merely beating a falling benchmark.
- Negative excess returns are handled in ways that can distort rankings.
| Fund (Sebi paper) | Excess return | Tracking error | IR |
|---|---|---|---|
| Fund K | 1.11% | 4.08% | 0.27 |
| Fund L | 1.49% | 15.95% | 0.09 |
Sebi’s paper uses this pair to show how the ratio can distort fund ranking.
Suggested fixes
- Ignore the negative sign (creates inconsistency between positive and negative IRs).
- Multiply excess return and tracking error rather than dividing.
- Sebi may need to standardise treatment of negative values across risk-adjusted measures.
Exam angle
- Regulator: Sebi; data collector: AMFI.
- Term: RAR – risk-adjusted return.