Sharpe Ratio
Sharpe Ratio: Measuring & Comparing Mutual Fund Risk
The Sharpe Ratio indicates how much risk was taken to generate the returns. Higher the value, it means the fund has been able to give better returns for per unit risk taken.
To calculate, subtract the risk free return (return on government bonds) from the Mutual Fund’s return, and then divide the result with the Standard Deviation of the Fund.
For example, if fund A and fund B both have 5-year returns of 15%, and fund A has a Sharpe ratio of 1.5 and fund B has a Sharpe ratio of 1.1, then A has given a higher risk-adjusted return.
The Sortino Ratio uses only the downward movement Standard Deviation in the denominator as it’s the downward volatility which defines risk in portfolios and not really the upward movement, which everyone likes.
Go look up the Sharpe Ratios of your Mutual Funds, and know that this is just one of the several factors to be taken into account while picking your funds.
