What is Information Ratio and How to Use it for Selecting Funds
Let us understand its meaning and how it is helpful in identifying skilled managers.
Oct 2025
4 mins read
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Mutual Funds disclose a wide array of data and information to help investors make informed investment decisions. From April 2025, fund houses have started disclosing Information Ratio on their website. Association of Mutual Funds in India (AMFI) aggregates this information and publishes scheme level performance data of equity funds (fund versus benchmark return) for 1 year, 3 year, 5 year and 10 year period.
Let us understand its meaning and how it is helpful in identifying skilled managers.
When we are investing in active funds, we expect the fund manager to not only beat the peer group but also the underlying benchmark.
Afterall, active funds charge higher TER vis-à-vis passive funds to scout for opportunities to outsmart the broader market. The outperformance is measured in two ways: 1) Higher return over the benchmark 2) The extent of downside protection when market/benchmark falls.
When you are analyzing the performance of your fund, looking at the Information Ratio can you give you insights into how skillful the fund manager has been in beating the benchmark. This ratio not only looks at the outperformance vis-à-vis the benchmark, it also takes into account the standard deviation of excess return (fund return minus the benchmark return). It tells you how much excess return a fund manager is generating for each unit of tracking error (deviation from the benchmark).
How is it calculated
• Information Ratio (IR) = (Portfolio Return – Benchmark Return)/Standard Deviation of Excess Return.
What it means:
• Portfolio Return: The annualized return generated by the fund/portfolio during a particular period.
• Benchmark Return: The annualized return of a comparable index (e.g., NIFTY 50, Nifty 500, etc).
• Standard Deviation of Excess Return: Measures how much a funds return deviate from its benchmarks return over time.
How to interpret Information Ratio
• Greater than zero: Fund has outperformed the benchmark.
• Less than zero: Fund has underperformed the benchmark.
Example 1
3 year Fund Return: 12%
3 year Benchmark Return: 9%
3 year Standard Deviation: 3%
3 year Information Ratio: (12%-9%) / 4% = 0.75
It suggests that for every 1% of risk taken, the fund has generated an additional 0.75% return over the benchmark.
Example 2
3 year Fund Return: -3%
3 year Benchmark Return: - 9%
3 year Standard Deviation: 7%
3 year Information Ratio: (-3%) – (-9%) / 7%: 0.85
It suggests that for every 1% of risk taken, the fund has generated an additional 0.85% return over the benchmark. The fund has fallen less than the benchmark.
Example 3
3 year Fund Return: 8%
3 year Benchmark Return: 12%
3 year Standard Deviation: 5%
3 year Information Ratio: (8%-12%)/5%: -0.8
This means that for every 1% of risk taken, the fund has underperformed the benchmark by -0.80%.
Things to remember:
• Compare Information Ratios within the same peer group and similar time period. Large Cap vs Large Cap. Small Cap vs Small Cap and so on.
• Higher the IR better the fund manager’s stock picking skills.
• Useful for comparing actively managed funds or smart beta strategies against a passive benchmark.
• Compare Information Ratio with other metrics like Sharpe Ratio, Sortino Ratio and Alpha while evaluating a fund.
Summing up, Information Ratio can be a useful metric to asses the skills and stock picking ability of fund managers to understand how they have performed over long run. Note that a higher IR does not mean that the fund will continue to beat its benchmark and peer group forever. That said, it gives a fair idea about the fund’s risk and outperformance.
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PGIM India Asset Management Private Limited
(CIN - U74900MH2008FTC187029)
Toll Free Number: 1800 209 7446
Email: care@pgimindia.co.in
This is an Investor Education and Awareness Initiative by PGIM India Mutual Fund.
All the Mutual Fund investors have to go through a one-time KYC (Know Your Customers) process. Investor should deal only with the Registered Mutual Funds (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit https://www.pgimindia.com/mutual-funds/ieid.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
All the Mutual Fund investors have to go through a one-time KYC (Know Your Customers) process. Investor should deal only with the Registered Mutual Funds (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit https://www.pgimindia.com/mutual-funds/ieid.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
The information contained herein is provided by PGIM India Asset Management Private Limited (the AMC)
on the basis of publicly available information, internally developed data and other third-party
sources believed to be reliable. However, the AMC cannot guarantee the accuracy of such information,
assure its completeness, or warrant such information will not be changed. The information contained
herein is current as of the date of issuance* (or such earlier date as referenced herein) and is
subject to change without notice. The AMC has no obligation to update any or all of such
information; nor does the AMC make any express or implied warranties or representations
as to its completeness or accuracy. There can be no assurance that any forecast made
herein will be actually realized. These materials do not take into account individual
investor's objectives, needs or circumstances or the suitability of any securities,
financial instruments or investment strategies described herein for particular investor. Hence,
each investor is advised to consult his or her own professional investment / tax advisor / consultant for advice in this regard.
The information contained herein is provided on the basis of and subject to the explanations, caveats and warnings set out elsewhere herein.
The views of the Fund Manager should not be construed as an advice and investors must make their own investment decisions regarding investment/ disinvestment in securities market and/or suitability of
the fund based on their specific investment objectives and financial positions and using such independent advisors as they believe necessary.
