Sharpe ratio
Risk-adjusted return that shows how much excess return a fund earns per unit of total volatility.
The Sharpe ratio is the most widely cited risk-adjusted return metric in fund evaluation. It asks: "For every unit of risk the fund is taking, how much extra return is it delivering above the risk-free rate?" Two funds with the same trailing return but different Sharpe ratios are not equivalent — the one with higher Sharpe is delivering the same result with less risk.
What it measures
Sharpe ratio normalises excess return by total return volatility. It rewards funds that deliver high returns efficiently — without excessive gyration. A fund that earns 14% with low volatility beats one that earns 16% while oscillating wildly, depending on how much lower the volatility is.
How it is computed
Sharpe = (R_p − R_f) / σ_p
Where:
R_p= annualised portfolio return over the look-back (MintByte uses 3-year monthly returns)R_f= annualised risk-free rate (91-day T-bill yield, monthly average; typically 6.5–7% in current India cycle)σ_p= annualised standard deviation of the fund's monthly returns (monthly_σ × √12)
Example: A mid-cap fund earns 17% annualised, R_f = 6.8%, monthly σ = 4.2% → annualised σ = 14.5%. Sharpe = (17 − 6.8) / 14.5 = 0.70.
How to interpret
| Sharpe | Reading |
|---|---|
| > 2.0 | Excellent — rare in equity funds |
| 1.0 – 2.0 | Good — well-managed risk-adjusted performance |
| 0.5 – 1.0 | Acceptable — average for Indian equity category |
| < 0.5 | Poor — return not compensating for risk taken |
| < 0 | Negative — fund returned less than the risk-free rate |
Indian large-cap equity funds typically range 0.5–1.0 over a 3-year window. Debt funds often show 1.5–3.0 because volatility is structurally lower.
Limitations + caveats
Sharpe penalises upside volatility equally with downside — a fund that spikes up frequently looks worse than it truly is. The metric assumes returns are normally distributed; Indian equity funds with skewed distributions (common in small-cap) are better assessed with Sortino Ratio. Sharpe is sensitive to the choice of risk-free rate and look-back window; a 1-year Sharpe can differ dramatically from a 5-year figure for the same fund.
Related metrics
- Sortino Ratio — variant that only penalises downside volatility; better for skewed funds.
- Alpha — excess return after accounting for market exposure (beta), not just risk-free rate.
- Volatility — the
σ_pdenominator; understanding it clarifies what Sharpe is normalising.
Sources
Monthly NAV returns: AdvisorKhoj API. Risk-free rate: RBI 91-day T-bill auction average, updated monthly. Sharpe recomputed monthly after NAV refresh.