Choose funds offering high risk-adjusted returns: All you need to know

When an investor takes higher risk, ideally, he should get higher returns. The same holds true for your mutual fund manager

To evaluate whether the extra risk that a fund manager took has resulted in higher returns, look at the Sharpe Ratio of the scheme

The Sharpe Ratio is the risk-adjusted return of a portfolio. A fund with a higher Sharpe Ratio is considered superior compared to its peers

If two funds have similar returns, opt for one with a higher Sharpe Ratio, as it shows that the scheme’s excess returns are due to smart investment decisions

Don't take a call on a scheme solely based on the Sharpe Ratio. Use it to evaluate the fund with other performance ratios

In some cases, the Sharpe Ratio can be misleading and give an incorrect picture, especially in funds that invest in options or warrants.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel