Information ratio in mutual fund performance
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.
Comparison with Sharpe ratio
| Dimension | Sharpe Ratio | Information Ratio |
|---|---|---|
| Numerator | Excess return over risk-free | Active return over benchmark |
| Denominator | Total volatility | Tracking error |
| Use case | Total return assessment | Active management assessment |
Information ratio is particularly relevant for evaluating active mutual fund managers’ ability to consistently beat benchmarks.
Use in active fund evaluation
Information ratio answers: “Does this active manager consistently add value versus the benchmark?”
- High IR: Manager consistently outperforms benchmark with low tracking error.
- Low IR: Inconsistent or modest outperformance, or high tracking error.
For investors choosing between active and passive (index) funds, a consistently low Information ratio across active funds in a category supports passive preference.
See also
- Mutual funds in India
- Alpha mutual fund
- Beta mutual fund
- Sharpe ratio
- Sortino ratio
- Treynor ratio
- Tracking error
- R-squared
- Active vs passive equity in India
External references
References
- CFA Institute curriculum on Information Ratio.
- Grinold, Richard and Kahn, Ronald. “Active Portfolio Management.” 1999.