Key Ratios to Mutual Fund Performance Analysis

Before investing in a mutual fund , it’s prudent to analyse its performance on the basis of certain parameters. It will help you to estimate your future returns and determine whether it’s beneficial for you to invest in a specific fund or not. Here are some key ratios that can help you evaluate the performance of a mutual fund.

1. Expense Ratio Expense ratio measures the cost incurred by the fund manager for the management of a mutual fund scheme. It is calculated by dividing the operating expenses with the total value of your investment in a particular mutual fund scheme.A higher Expense Ratio denotes that the fund management company is charging more from the investors and hence, the actual returns provided by the mutual fund will be lower.{2D743194-97C2-43F9-BC28-AEC370801ECD}
2. Standard Deviation Standard deviation is the measure of the volatility of a mutual fund. A high volatility means that the fund is riskier and vice-versa. With the help of standard deviation of a mutual fund, you’ll be able to evaluate how much the fund’s return can deviate from the historical mean return of that scheme.The standard deviation of a mutual fund is calculated by dividing the sum of squared difference between each monthly return and its mean with the number of monthly return data.
3. Sharpe Ratio Named after its founder William F. Sharpe, the Sharpe Ratio measures the risk adjusted performance of a mutual fund. It is calculated by dividing the excess returns of a mutual fund scheme over a risk-free rate with the standard deviation of fund’s returns over a specific period.Formula for Sharpe Ratio = (Average fund return – risk free rate of return) / standard deviation of the fund’s returns over a given period.A higher Sharpe ratio denotes that a fund is performing well. However, if the Sharpe Ratio is negative, it implies that the fund is underperforming with respect to the risk-free rate of return.
4. Treynor Ratio Very similar to the Sharpe Ratio, Treynor Ratio also measures excess returns provided by the mutual fund scheme over a risk-free rate, except that is uses market risk (represented by Beta) in the denominator instead of standard deviation.Formula for Treynor Ratio = (Average fund return – risk free rate of return) / Beta of the mutual fund were Beta = (standard deviation of mutual fund / standard deviation of benchmark) x R square
5. Information Ratio Also known as the Appraisal Ratio, the Information Ratio of a mutual fund will help you to evaluate whether it is delivering the expected returns or not, as compared to the benchmark index. It is calculated by dividing the active returns of a mutual fund (mutual fund returns – the benchmark returns) with the volatility of those returns represented by tracking error (difference of standard deviation of mutual fund and benchmark).A higher information ratio means that a mutual fund is able to deliver risk adjusted returns consistently as compared to the benchmark.

The Final Word As a diligent investor, it’s crucial for you to know these ratios pertaining to a mutual fund scheme before you go on to invest in it. These ratios, usually mentioned in the mutual funds scheme document, will help you to and analyse the scheme’s performance and evaluate whether you’ll be able to achieve your goals by investing in it or not.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.