Mastering Investment with Information Ratio

Information Ratio helps in navigating the complexities of the investment landscape by assessing an active fund manager's performance. And though it has its limitations, it remains an essential part of the finance industry. The article explains what Information Ratio is and how investors can use it as another tool

One of the widely accepted facts among investors now is that mutual funds can be a powerful tool for wealth creation, especially when it concerns retail investors. This is evident from the substantial monthly inflows into equity mutual fund schemes over the past few years. In June 2024 alone, inflows, including a few new fund offers, surpassed 40,000 crore. SIP contributions also remained robust, exceeding 21,000 crore. However, another set of data tells a different story. According to the Association of Mutual Funds in India (AMFI), 49.74 lakh new SIP accounts were registered in May 2024 as compared to 63.65 lakh in April. Moreover, SIP discontinuations rose by 32.21 per cent, reaching 43.96 lakhs in May from 33.25 lakhs in the previous month.

Consequently, the SIP stoppage ratio, which measures the number of SIPS discontinued or expired as a percentage of new SIPs registered, hit 88.38 per cent in May, surpassing the previous high of 80.69 per cent in May 2020. One of the reasons that investors are currently cautious in their approach is that they are waiting for the air to be clear of the uncertainty around higher market valuation and the election outcome, including the Union Budget. However, long-term investors should avoid trying to time the market and instead focus on honing their fund selection skills. An important metric in this regard is the Information Ratio, which measures investment performance.

Defining Information Ratio