Performance Metrics on WebNotes

CAGR vs XIRR for mutual fund returns

Mon, 18 May 2026 00:00:00 +0000

CAGR (Compound Annual Growth Rate) and XIRR (Extended Internal Rate of Return) are two methods to compute mutual fund returns. They differ in application:

CAGR: For single-investment-single-withdrawal scenarios.
XIRR: For multi-cash-flow scenarios like SIPs, SWPs.

CAGR

Formula

CAGR = (Final value / Initial value)^(1/Number of years) - 1

When to use

Lump-sum investment, lump-sum redemption: One investment, one redemption.
Direct stock investment: Single buy, single sell.

Example

Rs 10 lakh invested in 2019, sold for Rs 18 lakh in 2024 (5 years):

Credit quality buckets in debt mutual funds

Mon, 18 May 2026 00:00:00 +0000

Credit quality buckets categorise debt mutual fund holdings by credit rating, indicating the default risk of each instrument. Indian credit ratings are issued by SEBI-registered Credit Rating Agencies (CRAs): CRISIL, ICRA, CARE, India Ratings, Brickwork. Mutual funds disclose their portfolio composition by credit-quality bucket in monthly factsheets.

Credit rating scale

Standard credit-rating scale (long-term):

Rating	Interpretation	Default risk
AAA	Highest credit quality	Negligible
AA+ to AA-	High credit quality	Very low
A+ to A-	Adequate credit quality	Low
BBB+ to BBB-	Moderate credit quality	Moderate
BB+ and below	Below investment grade	High (junk)
D	Default	In default

Indian mutual funds primarily hold AAA and AA-rated instruments. AA- and below are typically held only by credit risk mutual funds .

Downside and upside capture ratios

Mon, 18 May 2026 00:00:00 +0000

Downside and upside capture ratios measure how much of the benchmark’s down moves and up moves a mutual fund captures, providing insight into the fund’s asymmetric performance characteristics.

Formulas

Upside capture = Scheme return in up months / Benchmark return in up months × 100.
Downside capture = Scheme return in down months / Benchmark return in down months × 100.

Interpretation

Upside capture

>100: Fund outperforms benchmark in up months.
=100: Fund matches benchmark in up months.
<100: Fund underperforms benchmark in up months.

Downside capture

<100: Fund declines less than benchmark in down months (defensive).
=100: Fund matches benchmark in down months.
>100: Fund declines more than benchmark in down months.

Ideal scenario

The ideal active mutual fund:

Information ratio in mutual fund performance

Mon, 18 May 2026 00:00:00 +0000

The Information ratio measures the active return (scheme return minus benchmark return) per unit of tracking error (volatility of active return). It indicates how consistently a mutual fund generates excess return versus its benchmark.

Formula

Information ratio = (Scheme return - Benchmark return) / Tracking error

Where:

Active return: Scheme return - Benchmark return.
Tracking error: Standard deviation of active return.

Interpretation

Information Ratio	Interpretation
> 0.75	Excellent active management
0.50 to 0.75	Good
0.25 to 0.50	Marginal
< 0.25	Poor active management

Information ratios above 0.5 are typically considered good for actively-managed equity mutual funds.

Macaulay and Modified duration in bond and debt mutual funds

Mon, 18 May 2026 00:00:00 +0000

Macaulay duration is the weighted-average time to receipt of cash flows from a bond portfolio. Modified duration measures the bond-price sensitivity to interest-rate changes. Both are critical metrics for evaluating debt mutual funds and their rate-cycle positioning.

Macaulay duration

Definition

Macaulay duration = Sum of (Time × Present Value of Cash Flow) / Total Bond Price

It represents the weighted-average time (in years) for which the investor must wait to receive the bond’s cash flows.

Maximum drawdown in mutual fund analysis

Mon, 18 May 2026 00:00:00 +0000

Maximum drawdown (max DD) measures the largest peak-to-trough decline in a mutual fund’s NAV over a measurement period. It represents the worst-case loss an investor would have experienced had they invested at the absolute peak and sold at the absolute trough during that period.

Interpretation

Max drawdown is typically expressed as a percentage:

5-15%: Conservative funds (debt, conservative hybrid).
20-30%: Balanced or aggressive hybrid.
30-50%: Pure equity (large-cap to mid-cap).
50-65%: Small-cap and concentrated equity.
65%+: Sectoral, thematic, or concentrated active funds during extreme corrections.

Use cases

Risk tolerance assessment

Maximum drawdown helps investors understand:

Portfolio turnover ratio in mutual funds

Mon, 18 May 2026 00:00:00 +0000

Portfolio turnover ratio measures how frequently a mutual fund manager buys and sells securities, expressed as an annual percentage of the portfolio. It indicates the trading intensity of the fund.

Calculation

Portfolio turnover = Min(Buys, Sells) / Average AUM × 100

Where:

Buys: Total value of securities purchased during the year.
Sells: Total value of securities sold during the year.
Average AUM: Average scheme AUM over the period.

A turnover of 100% means the fund effectively replaced the entire portfolio once during the year.

R-squared in mutual fund analysis

Mon, 18 May 2026 00:00:00 +0000

R-squared measures the proportion of a mutual fund’s return variability that is explained by its benchmark index, ranging from 0 to 100 (or 0 to 1). It indicates how closely the fund’s returns track the benchmark.

Interpretation

R-squared	Interpretation
85-100	Closely tracks benchmark (typical for index/closet-index funds)
70-85	Reasonable benchmark alignment
50-70	Moderate benchmark alignment
< 50	Weak benchmark alignment

For Indian mutual funds:

Index funds: R-squared typically 99+ (very close tracking).
Active large-cap funds: R-squared 85-95 typically.
Mid/small-cap funds: R-squared 70-90.
Sector/thematic funds: R-squared can be lower (60-80).

Use cases

Beta interpretation

R-squared determines whether beta is meaningful:

Sharpe ratio in mutual fund performance

Mon, 18 May 2026 00:00:00 +0000

The Sharpe ratio is a widely-used measure of risk-adjusted return that computes excess return per unit of total volatility. Developed by Nobel laureate William Sharpe, it remains one of the most-cited performance metrics in mutual fund evaluation.

For Indian retail investors comparing mutual fund schemes, Sharpe ratio enables apples-to-apples comparison of risk-return profiles across different schemes.

Formula

Sharpe ratio = (Scheme return - Risk-free return) / Standard deviation of scheme returns

Sortino ratio in mutual fund performance

Mon, 18 May 2026 00:00:00 +0000

The Sortino ratio is a risk-adjusted return measure that computes excess return per unit of downside deviation (volatility of negative returns only), rather than total volatility as in the Sharpe ratio . The Sortino ratio is more intuitive for most investors because it penalises only “bad” volatility (drawdowns) and not “good” volatility (upside).

Formula

Sortino ratio = (Scheme return - Risk-free return) / Downside deviation

Where:

Downside deviation: Standard deviation of only negative returns (or returns below a target threshold).

The downside deviation captures only the “loss volatility”, aligning with investor intuition that risk = potential loss.

Standard deviation in mutual fund performance

Mon, 18 May 2026 00:00:00 +0000

Standard deviation measures the volatility of a mutual fund’s returns, indicating the typical deviation of returns from the average. Higher standard deviation = higher volatility = higher uncertainty in outcomes.

Annualised standard deviation

For mutual fund analysis, returns are typically annualised:

Monthly returns are computed and annualised by multiplying by √12.
The annualised standard deviation indicates the typical year-to-year variation.

Typical ranges by fund category

Category	Typical Annual Std Dev
Large-cap equity	18-25%
Mid-cap equity	25-30%
Small-cap equity	30-35%
Aggressive hybrid	12-18%
Conservative hybrid	5-10%
Long duration debt	6-10%
Short duration debt	2-4%
Liquid fund	0.5-1%

Interpretation

One standard deviation rule

Approximately 68% of returns fall within ±1 standard deviation of the mean. For an equity fund with:

Total Return Index (TRI) benchmarking rule

Mon, 18 May 2026 00:00:00 +0000

SEBI’s Total Return Index (TRI) benchmarking rule requires mutual fund schemes to compare performance against Total Return Index variants rather than Price Return Index. The rule, effective from February 2018, aligned mutual fund benchmarking with international best practice and produces more honest active-fund-vs-index comparisons.

Background

Price Return Index (PRI)

The Price Return Index (PRI) of an underlying index tracks only price changes:

Doesn’t include dividend reinvestment.
Understates the actual total return achievable by index investing.

Total Return Index (TRI)

The Total Return Index includes:

Tracking error and tracking difference in passive funds

Mon, 18 May 2026 00:00:00 +0000

Tracking error measures the volatility of a passive fund’s return deviation from its benchmark index, while tracking difference measures the average return deviation. Both are key quality metrics for index funds and ETFs .

Formulas

Tracking difference = Average (Scheme return - Benchmark return) over period.
Tracking error = Standard deviation of (Scheme return - Benchmark return) over period.

Both are typically expressed as annualised percentages.

Typical ranges

For well-run Indian passive funds:

Treynor ratio in mutual fund performance

Mon, 18 May 2026 00:00:00 +0000

The Treynor ratio is a risk-adjusted return measure that computes excess return per unit of systematic risk (beta) , rather than total volatility as in the Sharpe ratio . The Treynor ratio is most meaningful for well-diversified portfolios where unsystematic risk is largely diversified away.

Formula

Treynor ratio = (Scheme return - Risk-free return) / Portfolio beta

Where:

Portfolio beta: The scheme’s systematic risk relative to the market benchmark.

Interpretation

Higher Treynor ratio = better risk-adjusted return per unit of systematic risk.

XIRR for SIP returns

Mon, 18 May 2026 00:00:00 +0000

XIRR (Extended Internal Rate of Return) is the correct method to compute annualised returns on SIP investments, properly accounting for the time-value of each periodic instalment. Unlike CAGR (which assumes single-investment-single-withdrawal), XIRR handles the multiple-cash-flow nature of SIPs.

Why XIRR for SIPs

SIP investing involves:

Multiple monthly investments: Each at different NAV.
Different holding periods per instalment: Earliest instalment has longest holding period; latest has shortest.
Different time-value of cash flows: Money invested 5 years ago vs 1 year ago.

CAGR over the full SIP period would treat all the invested money as if it were a single lump-sum at SIP start, materially misstating the actual return.

Yield to Maturity (YTM) in debt mutual funds

Mon, 18 May 2026 00:00:00 +0000

Yield to Maturity (YTM) is the expected annualised return on a debt mutual fund if all bonds in the portfolio are held to maturity. It is one of the most-used metrics for evaluating debt fund expected returns and is reported in monthly factsheets by all major AMCs.

Calculation

For a bond:

YTM is the discount rate that equates the present value of future cash flows to the current bond price.

For a debt mutual fund: