Information Ratio — Practical MF Use

Information Ratio (IR) measures a fund manager's active-return per unit of active-risk (tracking error): IR = (Fund Return − Benchmark Return) / Tracking Error. It is the cleanest metric for judging whether the manager's deviations from benchmark are paying off.

Worked INR example

Mirae Asset Large Cap Fund over 5 years: fund 14.2%, benchmark (NIFTY 100 TRI) 12.8%, tracking error 3.5%. IR = (14.2 − 12.8)/3.5 = 0.40. A SEBI large-cap peer with IR 0.6 is generating active alpha more consistently per unit of bench-deviation. IR > 0.5 over 5+ years is rare and a strong skill signal; IR < 0 means active management is destroying value vs. an index fund.

When to use

• Active vs index choice: if peer-group IR < 0.3 consistently, prefer the index fund
• Manager-change evaluation — IR after new manager joins
• Choosing between two active funds with similar absolute returns

SEBI caveat

SEBI factsheets don't directly disclose IR — compute from monthly returns vs. benchmark TRI (Total Return Index). At least 36 monthly observations needed for stability. IR is biased upward in bull markets — always evaluate across a full cycle.

Related terms: Information Ratio, Tracking Error, Alpha.