Contents
Sharpe Ratio measures the excess return earned by a fund or portfolio per unit of total risk (standard deviation), using the risk-free rate (the conventional name for the short-term sovereign yield used as a benchmark) as the baseline.
Formula
Sharpe = (Rp − Rf) / σp
Where: Rp = annualised portfolio return, Rf = annualised risk-free rate (period-average over the measurement window), σp = annualised standard deviation of portfolio returns.
Higher Sharpe = more return per unit of risk. A Sharpe of 1.0 means the portfolio earned 1% of excess return for every 1% of annualised standard deviation.
How MintByte Computes Sharpe
MintByte uses the period-average 91-day RBI T-bill rate over the same rolling window as the return measurement (3-year default, monthly returns). This matches the AdvisorKhoj (AK) industry methodology. As of OI-4 Fix 1 (2026-06-02), the in-house rate was updated from 6.5% to 4.4% p.a. — the 3-year trailing average of RBI 91-day T-bill secondary market yield (RBI Weekly Statistical Supplement, Table 18). Using a period-average rather than a point-in-time rate prevents distortion from anomalous yield spikes at window boundaries.
Daily returns are scaled to annualised standard deviation using √252 (252 trading days per NSE calendar year). Monthly standard deviation is annualised as σmonthly × √12.
Worked Example (Indian Context)
SBI Bluechip Fund – Direct Plan: 3-year annualised return = 16.8%, annualised σ = 14.2%, period-average T-bill Rf = 4.4%.
Sharpe = (16.8 − 4.4) / 14.2 = 12.4 / 14.2 = 0.87
HDFC Top 100 Fund – Direct Plan same period: return 15.2%, σ = 15.8%, same Rf.
Sharpe = (15.2 − 4.4) / 15.8 = 10.8 / 15.8 = 0.68
SBI Bluechip delivered higher Sharpe: better return per unit of risk, despite a lower absolute return differential than the σ gap might suggest.
Interpretation and Benchmarks
| Sharpe Range | Signal |
|---|---|
| < 0.5 | Weak risk-adjusted return; benchmark passive alternatives |
| 0.5 – 1.0 | Acceptable; typical for diversified equity in volatile markets |
| 1.0 – 2.0 | Strong; consistent alpha and controlled drawdowns |
| > 2.0 | Exceptional; rare over multi-year windows; verify data quality |
Caveats
Sharpe assumes normally distributed returns — a poor assumption for equity funds with skew (large drawdown years). In non-normal distributions, the Sortino Ratio (which penalises only downside deviation) gives a more accurate picture. Sharpe is also sensitive to the Rf choice and can be gamed by funds that smooth returns through less-frequent NAV-sensitive instruments.
Related terms: Sortino Ratio, Standard Deviation, Alpha, Beta, Treynor Ratio.
Primary source: SEBI Circular SEBI/HO/IMD/DF2/CIR/P/2021/647 (risk ratio disclosures); RBI 91-day T-bill yield series: rbi.org.in Weekly Statistical Supplement. Sharpe (1966): “Mutual Fund Performance”, Journal of Business.
Past performance is not indicative of future returns. Mutual fund investments are subject to market risks. Read all scheme-related documents carefully. ARN-314872. APMI APRN-01658. Content is informational and not investment advice.