Educational guide
Sharpe Ratio — Measuring Risk-Adjusted Return
Two funds with the same 12% return are not equal if one took twice the volatility. Sharpe Ratio captures that with one number.
// the formula
Sharpe = (Fund return − Risk-free rate) / Standard deviation of fund return.
Numerator: excess return earned over the risk-free rate (usually the 91-day T-bill yield).
Denominator: how bumpy the ride was.
// interpretation
Higher is better. A Sharpe of 1.0+ over 5+ years is excellent for an Indian equity fund. 0.5–1.0 is acceptable; below 0.5 means the manager is not earning the volatility risk taken.
// limits
Sharpe treats upside and downside volatility equally — but investors only fear downside. The Sortino Ratio fixes this by using downside deviation only.
// frequently asked questions
Value Research, Morningstar India, AMC factsheets and aggregator apps publish 3-year Sharpe by default.