| Mutual fund Investments | | | | for each unit of risk taken by the fund. It is |
| Mutual funds are fast becoming one of the most | | | | measured as the difference in return generated |
| preferred investment avenues in the country. | | | | by the fund and the return generated by the |
| Today, the investor is spoilt for choice and is | | | | risk-free rate of interest. A negative excess |
| confused where to put in his hard earned money. | | | | return means the fund is generating less return |
| Which of these funds are ‘safe’ but still | | | | than the risk-free rate. Sharpe ratio should always |
| can give the best of returns. | | | | be used as a measure of comparison between |
| Risk associated with a fund, is defined based on | | | | similar funds. |
| fluctuations of returns. The higher the fluctuations | | | | Treynor Ratio |
| in the returns, in a given period, higher the risks | | | | This is another comparison ratio, which measures |
| associated with the fund. | | | | the excess returns a fund generates for each unit |
| By using the risk-return relationship, we try to | | | | of market risk taken. Again, it should be used to |
| assess the competitive strength of the mutual | | | | compare funds in the same category, and in any |
| funds vis-à-vis one another in a better way. Here | | | | such category a higher Treynor ratio is better |
| are a few measures of risks and how these can | | | | than a lower ratio. |
| help you choose the fund that suits you best. | | | | Information Ratio |
| Measures of Risk | | | | This is a way to see, whether a fund manager, |
| Beta | | | | who has taken risks that are greater than the |
| This represents fluctuations in the NAV of the | | | | market-risk, has acted upon good |
| fund vis-à-vis market. This is the relationship | | | | ‘information’. A higher information ratio |
| between the volatility in the fund’s returns | | | | indicates that the extra risk is being managed |
| and the market benchmark. The value of Beta | | | | more than adequately to generate extra rewards |
| for the benchmark is 1. A fund with a Beta | | | | for the fund. |
| greater than 1 is more volatile, and a fund with a | | | | With these above measures, an investor would |
| Beta less than 1 is less volatile. | | | | be armed well enough in taking a reasonably good |
| Sharpe Ratio | | | | decision. |
| This ratio measures the amount of excess return | | | | |