January 18, 2025
In a significant regulatory update, the Securities and Exchange Board of India (SEBI) has issued a new directive that will change the way Mutual Fund (MF) performances are evaluated and disclosed to investors. Effective from January 17, 2025, SEBI has introduced mandatory daily disclosures of the Information Ratio (IR) for equity-oriented mutual fund schemes, aimed at providing a more nuanced understanding of fund performances relative to their risks.
Background on the Information Ratio (IR)
The Information Ratio is a critical financial metric used to assess the risk-adjusted return of a mutual fund scheme. It measures a portfolio manager’s ability to generate excess returns compared to a benchmark but adjusts for the volatility of those returns. This ratio not only evaluates the raw returns but also incorporates the risk taken to achieve those returns, offering a comprehensive view of the performance consistency.
Implications of the New SEBI Directive
According to the circular SEBI/HO/IMD/IMD-PoD-2/P/CIR/2025/6, mutual funds and asset management companies (AMCs) are now required to publish the IR of their equity-oriented schemes daily on their websites. This data must also be available in a comparable, downloadable format on both the AMC and Association of Mutual Funds in India (AMFI) websites, ensuring that investors can easily access and interpret these metrics.
Standardizing the Calculation
The calculation of the Information Ratio will follow a standardized formula across the industry:
IR= (Portfolio Rate of Returns−Benchmark Rate of Returns) / Standard Deviation of Excess Return
The benchmarks and methodologies applied will ensure uniformity, with the volatility or standard deviation based on daily return values, enhancing comparability across different mutual fund schemes.
Enhancing Investor Awareness
Recognizing the complexity of financial ratios and their interpretation, SEBI has also emphasized the need for investor education. AMCs and AMFI are tasked with taking adequate steps to educate investors about the significance of the Information Ratio and risk-adjusted returns. This initiative will include using various communication channels to reach a broad audience, ensuring that investors are well-informed about how to evaluate fund performances effectively.
Disclaimer: This is for informational purposes only and does not constitute legal, financial, or professional advice. Readers are advised to refer to official SEBI regulations for specific guidance tailored to their circumstances.
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