Sebi mandates mutual funds to disclose IR for risk-adjusted returns of schemes: See More

On Friday, the Securities and Exchange Board of India (Sebi) directed asset management companies (AMCs) to disclose the information ratio (IR) of mutual fund schemes daily on their websites. IR is a key measure used to assess the risk-adjusted return (RAR) of a scheme, helping investors understand how well a fund performs relative to its risk.

Sebi explained that IR is an important financial ratio for evaluating the performance of mutual fund schemes. It helps determine the skill of a portfolio manager in generating returns above a benchmark while considering the risk involved. IR also measures the consistency of performance, taking into account the standard deviation (or risk) of returns.

Earlier, Sebi required AMCs to file periodic reports on scheme performance, and some disclosures were made voluntarily by the companies. Now, the market regulator has made it mandatory for AMCs to disclose IR, but only for equity-oriented schemes.

Details on IR disclosure

Disclosure format: Sebi said IR should be disclosed on the websites of AMCs in a clear, downloadable and machine-readable format. This disclosure will also be available through the Association of Mutual Funds in India (AMFI).

Calculation method: IR for equity-oriented mutual fund schemes will be calculated using the formula:

IR = (Portfolio return – Benchmark return) / Standard deviation of excess return

• Excess return: The difference between portfolio return and benchmark return.
• Benchmark: Tier 1 benchmark used by equity mutual fund schemes.
• Volatility: Calculated using daily returns.
• Portfolio return: Calculated using an arithmetic function.

Investor education

Sebi stressed the need for AMCs and AMFI to educate investors about IR and its importance. This includes explaining how IR is calculated and interpreted, as well as offering examples to help investors understand its impact on scheme performance. AMCs should allocate funds to educate investors, and use social and mass media to reach a wider audience.

Additionally, SEBI has provided a link to the format of IR disclosure, and AMCs should include a hyperlink to AMFI’s website with a simple explanation on how to interpret IR, the calculation formula and the ratio.

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