SEBI asks mutual funds to disclose a risk-adjusted return measure called Information Ratio

This ratio will need to be disclosed on a daily basis

The market regulator has asked mutual funds to disclose Information Ratio (IR) to capture the risk-adjusted return (RAR) ratio of any scheme or portfolio.

This will be applicable only to equity-oriented schemes.

In a circular issued on January 17, the Securities and Exchange Board of India (SEBI) said that mutual funds/ AMCs should disclose IR of a scheme portfolio on their website along with performance disclosure, on a daily basis. The regulator said that a need for this was felt to represent a more holistic measure of a scheme’s performance.

IR calculation will be done in this formulae: (Portfolio Rate of Returns less Benchmark Rate of Returns) / Standard Deviation of Excess Return.

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In this, Excess Return will be the Portfolio Rate of Returns less Benchmark Rate of Returns; Benchmark used in the above formula shall be the Tier 1 benchmark currently used by the equity oriented Mutual Fund schemes; Volatility/Standard deviation shall be calculated on the basis of daily return values; and Daily portfolio return shall be calculated using arithmetic function.

The circular said, "Considering the significance of volatility of performance in determining the suitability of MF schemes, Information Ratio (IR) is an established financial ratio to measure the RAR of any scheme portfolio. It is often used as a measure of a portfolio manager's level of skill and ability to generate excess returns, relative to a benchmark and also attempts to identify the consistency of the performance by incorporating standard deviation/risk factor into the calculation."
The regulator has also asked the Association of Mutual Funds in India (AMFI) to ensure that such disclosure shall be available on its website in a comparable, downloadable (spreadsheet) and machine readable format.