Why Information Ratio matters when you evaluate mutual funds

15 Jul 2025 , 11:29 AM

WHY INFORMATION RATIO MATTERS IN MUTUAL FUNDS?

A major improvement in evaluating MF performance is Information Ratio. According to AMFI, “Information Ratio evaluates how effectively a fund manager generates excess returns relative to the benchmark index.” There are 2 aspects. Firstly, Information looks at whether the fund manager beats the index TRI returns. However, that is not enough. The fund manager must also be justify the higher risk taken.

If index has 20% standard deviation and the fund has 30% standard deviation, then fund is riskier than the index and investors need compensation. After index returns and additional risk are compensated, what is left is captured by Information Ratio. Call it genuine alpha or excess returns over risk. Here is practical Information Ratio for Indian large cap funds, mid-cap funds and small cap funds.

INFORMATION RATIO FOR INDIAN LARGE CAP FUNDS

The table captures performance and Information Ratio of top-10 top large cap funds. Only funds with 5-year track record are considered and ranked on 5-Y Information Ratio.

Scheme Name	Returns (%) 1-Year	Returns (%) 3-Years	Returns (%) 5-Years	Info Ratio 5-Y (Reg)	Info Ratio 5-Y (Dir)
Nippon India Large Cap Fund	4.04	23.11	25.81	1.08	1.32
ICICI Prudential Large Cap Fund	5.04	21.31	23.04	0.75	0.95
HDFC Large Cap Fund	1.67	19.65	22.38	0.51	0.68
Aditya Birla Sun Life Large Cap Fund	5.01	18.83	21.19	0.30	0.58
Tata Large Cap Fund	1.03	17.95	20.69	0.12	0.46
Invesco India Large Cap Fund	4.49	20.18	20.69	0.10	0.48
Kotak Large Cap Fund	3.89	18.38	20.48	0.04	0.53
Franklin India Bluechip Fund	5.18	16.37	19.96	-0.05	0.12
Edelweiss Large Cap Fund	2.15	18.96	19.98	-0.13	0.51
Mahindra Manulife Large Cap Fund	2.47	17.16	19.84	-0.15	0.53
Data Source: AMFI

Out of 25 large cap funds with 5-year track record, if you consider regular plans, then only 7 out of 25 funds have a positive Information Ratio. The other 18 large cap funds have negative information ratio, indicating they are not compensating investors for index returns and excess risk taken. However, if investors look at direct plans instead of regular plans, then 12 funds have positive information ratio and only 13 funds have negative information ratio. In short, plan selection (direct over regular) can substantially alters Information Ratio performance of large cap funds.

INFORMATION RATIO FOR INDIAN MID-CAP FUNDS

The table captures performance and Information Ratio of top-10 mid-cap funds. Only funds with 5-year track record are considered and ranked on 5-Y Information Ratio.

Scheme Name	Returns (%) 1-Year	Returns (%) 3-Years	Returns (%) 5-Years	Info Ratio 5-Y (Reg)	Info Ratio 5-Y (Dir)
Motilal Oswal Midcap Fund	5.54	31.70	35.31	0.36	0.49
Edelweiss Mid Cap Fund	6.31	28.73	32.21	0.20	0.55
Nippon India Growth Mid Cap Fund	3.79	28.48	32.07	0.17	0.38
HDFC Mid Cap Fund	6.39	30.58	32.09	0.12	0.28
Quant Mid Cap Fund	-12.79	22.88	31.06	0.03	0.23
Invesco India Mid Cap Fund	15.35	31.02	30.27	-0.09	0.16
Kotak Midcap Fund	3.97	25.34	29.90	-0.25	-0.01
Mahindra Manulife Mid Cap Fund	-0.28	27.62	29.56	-0.30	0.08
ICICI Prudential Midcap Fund	2.71	24.76	29.27	-0.31	-0.12
Union Midcap Fund	2.40	22.10	28.61	-0.34	-0.07
Data Source: AMFI

Out of 24 mid-cap funds with 5-year track record, if you consider regular plans, only 5 out of 24 funds have positive Information Ratio. Other 19 mid-cap funds have negative information ratios, indicating they are not compensating investors for index returns and excess risk taken. If investors look at direct plans instead of regular plans, then 6 funds have positive information ratio and 18 funds have negative information ratio. In case of mid-caps, shifting to direct plans is not making any big difference.

INFORMATION RATIO FOR INDIAN SMALL CAP FUNDS

The table captures performance and Information Ratio of top-10 small cap funds. Only funds with 5-year track record are considered and ranked on 5-Y Information Ratio.

Scheme Name	Returns (%) 1-Year	Returns (%) 3-Years	Returns (%) 5-Years	Info Ratio 5-Y (Reg)	Info Ratio 5-Y (Dir)
Quant Small Cap Fund	-4.93	29.82	43.60	0.87	1.02
Nippon India Small Cap Fund	-1.67	28.60	37.20	0.45	0.63
Bandhan Small Cap Fund	9.85	33.42	35.76	0.33	0.64
HSBC Small Cap Fund	-2.94	25.06	34.56	0.04	0.23
HDFC Small Cap Fund	3.22	27.44	33.66	0.01	0.19
Bank of India Small Cap Fund	0.28	25.39	33.94	-0.04	0.22
Invesco India Smallcap Fund	8.38	29.88	33.06	-0.05	0.19
Franklin India Smaller Companies Fund	-3.85	28.12	34.07	-0.06	0.08
Tata Small Cap Fund	1.74	26.22	33.70	-0.09	0.14
Edelweiss Small Cap Fund	3.11	25.24	33.47	-0.14	0.12
Data Source: AMFI

Out of 21 small cap funds with 5-year track record, if you consider regular plans, then only 5 out of 21 funds have a positive Information Ratio. The other 16 small cap funds have negative information ratios, indicating they are not compensating investors for index returns and excess risk taken. However, if investors look at direct plans instead of regular plans, then 10 funds have positive information ratio and 11 funds have negative information ratio. The choice of plan is making a big difference in small cap funds.

FINAL WORD ON INFORMATION RATIO

Information Ratio helps separate the wheat from the chaff and figure out if the fund manager is using skill or just taking on more risk to show higher returns. While it may not be the final word on fund selection, the Information Ratio is a powerful tool to compare funds within a certain category, before taking an investment call.