Risk-adjusted return ratios
Sharpe, Sortino, Treynor and the information ratio: how much a fund earned for the risk it carried
Treasury bill yield as on 1 September 2026; repo rate as on 7 October 2026
Verified 12 October 2026
For training and education only. Not investment advice.
Trainer notes
Ask the room: two funds both returned 12% a year over three years. Is there anything left to compare? Collect answers. Someone will usually say 'how much they went up and down'. That is the subject of this deck.
A return figure says what a fund earned. It does not say how bumpy the journey was.
Two funds can reach the same return after very different rises and falls. A risk-adjusted ratio divides the return by a measure of those rises and falls.
Trainer notes
Keep the idea simple: return on top, a measure of risk below. The four ratios in this deck differ only in which return goes on top and which measure of risk goes below.
Standard deviation in plain words
TWO FUNDS, FOUR MONTHS
Fund S, monthly returns: +2%, +2%, +2%, +2%.
Fund V, monthly returns: +8%, −4%, +8%, −4%.
- Average monthly return of S = (2 + 2 + 2 + 2) ÷ 4 = 2%. Average of V = (8 − 4 + 8 − 4) ÷ 4 = 2%. The averages match.
- S is at its average in each of the four months, so its standard deviation is 0.
- V is 6 percentage points away from its average in each month: 8 − 2 = 6, and −4 − 2 = −6.
- Square the gaps, average them, take the square root: √[(36 + 36 + 36 + 36) ÷ 4] = √36 = 6. V's standard deviation is 6.
Result: Standard deviation is the typical distance of returns from their average. Higher means bumpier.
Illustration with invented funds and assumed figures. Factsheets use more months and state a yearly figure.
Trainer notes
This divides by the number of months (4). Many data providers divide by one less than the number of months; on that basis V's figure is √48 = 6.93. The idea is unchanged. Note also that standard deviation counts a rise of 6 points and a fall of 6 points alike. Equal averages do not mean equal results: over the four months S grows 8.24% and V 7.50%.
Four ratios, one pattern
Each divides an extra return by a measure of risk. Only the two parts change.
Sharpe ratio
(Fund return − risk-free rate) ÷ standard deviation of the fund's returns. Risk here is every up and down.
Sortino ratio
(Fund return − risk-free rate) ÷ downside deviation, which counts only the negative returns.
Treynor ratio
(Fund return − risk-free rate) ÷ beta. Beta shows how sensitive the fund's returns are to the market's moves.
Information ratio
(Fund return − benchmark return) ÷ standard deviation of that gap. The lower part is called tracking error.
Formulas as set out in Value Research, Statistical Variables Methodology (September 2023), and, for the information ratio, SEBI circular of 17 January 2025.
Trainer notes
The risk-free rate is the return available without taking market risk; slide 8 covers what Indian factsheets use. A beta of 1 means the fund has tended to move in line with its benchmark. Exception: some providers compute the Sortino ratio against a chosen target return instead of the risk-free rate, so check the definition before comparing figures from two sources.
Two funds, ranked two ways
ASSUMED, OVER 3 YEARS
Fund P: return 16% a year, standard deviation 20%.
Fund Q: return 14% a year, standard deviation 12.5%.
Risk-free rate: 6% a year.
- On return alone, P ranks first: 16% against 14%.
- Sharpe ratio of P = (16 − 6) ÷ 20 = 10 ÷ 20 = 0.50.
- Sharpe ratio of Q = (14 − 6) ÷ 12.5 = 8 ÷ 12.5 = 0.64.
- On Sharpe ratio, Q ranks first. For each point of standard deviation, Q earned 0.64 points over the risk-free rate and P earned 0.50.
Result: P earned more. Q earned more for each unit of ups and downs. Both statements describe the past.
Illustration with two invented funds and assumed figures. Not a forecast and not a view on any scheme.
Trainer notes
Neither ranking is 'the right one'. They answer different questions. Do not let the room conclude that Q is the fund to choose; the ratio says nothing about what either fund will do next.
The same two funds on all four ratios
Further assumed figures: benchmark return 12% a year; other inputs as shown in each row.
| Ratio | Fund P | Fund Q | Higher |
|---|---|---|---|
| Sharpe | (16 − 6) ÷ 20 = 0.50 | (14 − 6) ÷ 12.5 = 0.64 | Q |
| Sortino | Downside deviation 12.5%: (16 − 6) ÷ 12.5 = 0.80 | Downside deviation 8%: (14 − 6) ÷ 8 = 1.00 | Q |
| Treynor | Beta 1.25: (16 − 6) ÷ 1.25 = 8.0 | Beta 0.80: (14 − 6) ÷ 0.80 = 10.0 | Q |
| Information ratio | Tracking error 8%: (16 − 12) ÷ 8 = 0.50 | Tracking error 5%: (14 − 12) ÷ 5 = 0.40 | P |
Illustration with two invented funds and assumed figures. Not a forecast and not a view on any scheme.
Trainer notes
The point of the last row: the ratios need not agree. P beat the benchmark by more for each unit of tracking error, while Q did more for each unit of total risk, downside risk and market risk. Sharpe, Sortino and the information ratio are plain numbers; the Treynor ratio is in percentage points per unit of beta, so it is not comparable with the other three.
Which ratio answers which question
Sharpe ratio
What did the fund earn over the risk-free rate for each unit of its total ups and downs?
Sortino ratio
The same question, counting only the falls. Sharp rises are not held against the fund.
Treynor ratio
What did it earn over the risk-free rate for each unit of market risk? Suits a fund that is one holding among several.
Information ratio
What did it earn over its benchmark, and how steadily? It looks at the result of the fund manager's active choices.
Take-away: Compare a ratio only across funds of one category, over one period, worked out the same way.
Trainer notes
Sharpe uses total risk, so it suits a fund looked at by itself. Treynor uses only market risk (beta), on the reasoning that risk specific to single companies is spread thin in a diversified portfolio. For an index fund the information ratio says little about skill: the aim there is a small tracking error, not a return above the benchmark.
The risk-free rate in Indian factsheets
Factsheets state the rate used in a footnote. Many use an overnight rate such as MIBOR.
- ONE FACTSHEET, MAY 2026
- 5.52%Risk-free rate used for Sharpe ratios in one fund house's factsheet. Source shown: MIBOR.
- 91-DAY TREASURY BILL
- 5.26%Cut-off yield at the last auction, as shown by RBI on 1 September 2026: 5.2640%.
- RBI POLICY REPO RATE
- 5.50%Raised from 5.25% on 7 Oct 2026 (5.25% on 1 Sep 2026).
Sources: a fund house factsheet, May 2026; RBI Current Rates, as on 1 Sep 2026; RBI Monetary Policy Statement, 7 Oct 2026.
Trainer notes
MIBOR is the Mumbai Interbank Offered Rate. The fund house is not named; the factsheet is an example of the footnote, not a view on any scheme. It computed its ratios over three years on month-end NAVs. The rate matters: with 5% in place of 6%, Fund P's Sharpe ratio is (16 − 5) ÷ 20 = 0.55, not 0.50. Refresh these at each month-end, using market figures that are at least 30 days old. Market figures are shown with a lag of at least 30 days, in line with SEBI's norms on price data used for education.
SEBI's rule on the information ratio
The circular
SEBI's circular of 17 January 2025 made disclosure of the information ratio compulsory. It took effect within three months.
Which schemes
Equity-oriented schemes only.
Where and how often
On the fund house's website, with its performance disclosure, daily. AMFI's website carries it in a comparable, downloadable form.
How it is worked out
(Scheme return − benchmark return) ÷ standard deviation of that gap, using the Tier 1 benchmark and daily returns.
Source: SEBI circular SEBI/HO/IMD/IMD-PoD-2/P/CIR/2025/6, 'Disclosure of Risk adjusted Return - Information Ratio (IR) for Mutual Fund Schemes', 17 January 2025.
Trainer notes
The circular does not require Sharpe, Sortino or Treynor ratios; fund houses publish those by choice. AMFI's own explanatory note illustrates the calculation with 36 monthly returns over three years, while the circular says volatility is to be based on daily return values; if asked, say so and point to the circular. The requirement continues in SEBI's Master Circular for Mutual Funds of 20 March 2026.
If you learnt this from older material
The formulas are unchanged. What a scheme must disclose, and against what, has changed.
What older decks say
- No risk-adjusted ratio is compulsory.
- A fund is measured against a price index.
- A higher ratio marks out the fund to pick.
What holds now
- The information ratio is compulsory for equity-oriented schemes, daily.
- Benchmarks are total return indices, which include dividends.
- A ratio describes a past period. It assures nothing about the next.
Sources: SEBI circular of 17 January 2025 (information ratio); SEBI circular of 4 January 2018 (total return index, from 1 February 2018).
Trainer notes
Because benchmarks now include dividends, a scheme's return over its benchmark is measured against a higher bar than under a price index. The third row is not a rule change; it is how we are expected to speak. A mutual fund distributor explains what a ratio measures and does not present it as a reason to buy.
Four things people get wrong
Misconception'A higher Sharpe ratio means less risk.'
What is trueIt means more return per unit of risk in that period. A fund can have a higher Sharpe ratio and also a higher standard deviation.
Misconception'A high ratio will continue.'
What is trueThe four ratios are worked out from past returns. A higher past ratio assures nothing about future returns.
Misconception'Any two funds can be compared.'
What is trueCompare within one category, over one period, with one risk-free rate and one benchmark. Otherwise the figures do not line up.
Misconception'A negative ratio is just a low one.'
What is trueWhen a fund earns less than the risk-free rate, the ranking breaks down: a bumpier fund shows a less negative Sharpe ratio.
Trainer notes
Example for the fourth point: two funds return 4% against a risk-free rate of 6%. With a standard deviation of 10% the Sharpe ratio is −0.20; with 20% it is −0.10, which looks higher although the fund was bumpier. Other limits: standard deviation treats rises and falls alike; beta and the information ratio depend on the benchmark chosen; three years may cover only one kind of market.
Check yourself
Question 1: Fund X returned 13% a year with a standard deviation of 14%. Fund Y returned 11% with a standard deviation of 8%. The risk-free rate is 6%. Which Sharpe ratio is higher?
Answer: Y. X: (13 − 6) ÷ 14 = 0.50. Y: (11 − 6) ÷ 8 = 0.625. X earned more; Y earned more per unit of standard deviation.Question 2: A scheme returned 15% a year and its benchmark 12%. The standard deviation of the gap was 6%. What is the information ratio, and which schemes must disclose it?
Answer: (15 − 12) ÷ 6 = 0.50. Equity-oriented schemes must disclose it daily on the fund house's website, under SEBI's circular of 17 January 2025.Question 3: A client says: 'This fund has the highest Sharpe ratio in its category, so it will do well.' What would you explain?
Answer: The ratio describes a past period: return over the risk-free rate per unit of standard deviation. It depends on the period and the risk-free rate used, and a higher past ratio assures nothing about future returns. Returns are not assured.
Sources and disclaimer
Sources for the figures in this explainer
- Information ratio rule and formula: SEBI circular SEBI/HO/IMD/IMD-PoD-2/P/CIR/2025/6, 17 January 2025.
- Meaning and limits of the information ratio: AMFI explanatory notes on the information ratio (AMFI website).
- Sharpe, Sortino and Treynor formulas, beta: Value Research, Statistical Variables Methodology, Sept 2023 (secondary source).
- Risk-free rate 5.52% (FIMMDA MIBOR), three years, month-end NAV: a fund house factsheet, May 2026.
- 91-day Treasury bill 5.2640%: RBI Current Rates, as on 1 Sep 2026 (auction of 27 Aug 2026). Repo rate 5.50%: Monetary Policy Statement, 7 Oct 2026.
- Total return benchmarking from 1 February 2018: SEBI circular SEBI/HO/IMD/DF3/CIR/P/2018/04, 4 January 2018.
- Funds S, V, P, Q, X and Y and their figures are invented for illustration. They do not refer to any real scheme.
This material is for training and investor education only. It is not investment, tax or legal advice and is not a recommendation to buy, sell or hold any security or scheme. Examples use assumed figures unless a source and date are shown. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Trustner Asset Services Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-286886).