Context:
The Information Ratio (IR) has become an important metric to evaluate the performance of equity mutual fund schemes on a risk-adjusted basis. This ratio helps investors understand how well a fund has performed relative to its benchmark, considering the risks involved. In the five-year period from 2020 to 2025, one in three equity mutual fund schemes managed to beat their benchmark based on IR.
Key Insights on Fund Performance
- IR Metric: The IR is calculated by subtracting the benchmark return from the portfolio return and dividing by the standard deviation of the excess returns. A higher IR indicates better consistency in delivering returns relative to the benchmark, while a lower IR suggests underperformance.
- Positive IRs: Out of the 208 active equity schemes (excluding sectoral and thematic funds), only 62 schemes reported a positive IR over the past five years.
Category-Wise Performance
- Smallcap Funds: These funds showed the worst performance, with only 3 out of 21 schemes outperforming their benchmarks.
- Largecap and Midcap Funds: Both these categories had less than 20% of schemes reporting a positive IR over five years, indicating poor performance in the long run.
- Flexicap and Multicap Funds: These categories had better results, especially in the 1-year and 3-year periods.
Performance over Different Time Periods
- 1-Year Performance: Most schemes in all categories, except for large-cap funds, outperformed their benchmarks.
- 3-Year Performance: A majority of large-cap and multicap schemes delivered higher returns than their respective benchmarks.
- 5-Year Performance: Less than 20% of large-cap and mid-cap schemes reported positive IRs, showing a struggle in the long term.
Top and Bottom Performing Funds
- Best Performing Funds:
- Largecap: Nippon India Largecap Fund (IR: 0.51)
- Midcap: Motilal Oswal Midcap Fund (IR: 0.19)
- Smallcap: Quant Smallcap Fund (IR: 0.83)
- Worst Performing Funds:
- Largecap: Axis Bluechip Fund (IR: -1.12)
- Midcap: DSP Midcap Fund (IR: -1.37)
- Smallcap: ABSL Smallcap Fund (IR: -0.68)
Factors Driving Performance
- Fund Manager’s Abilities: A higher IR reflects a fund manager’s stock selection skills and timely sectoral shifts. Consistency in upside capture and downside protection is crucial.
- Risk-Adjusted Returns: Advisors recommend looking beyond IR and considering other metrics such as Sharpe ratio, alpha, and beta to evaluate funds’ ability to perform across different market cycles.
