Sebi mandates mutual funds to disclose IR for risk-adjusted returns of schemes

Market regulator Sebi on Friday asked asset management companies (AMCs) to disclose information ratio (IR), which is used to measure risk adjusted return of mutual fund schemes, on its website on a daily basis.“Considering the significance of volatility of performance in determining the suitability of MF schemes, Information Ratio (IR) is an established financial ratio to measure the RAR of any scheme portfolio. It is often used as a measure of a portfolio manager’s level of skill and ability to generate excess returns, relative to a benchmark and also attempts to identify the consistency of the performance by incorporating standard deviation/risk factor into the calculation,” said Sebi.

Earlier the market regulator mandated filing of periodic information regarding schemes performance by AMCs. Apart from this, the appropriate disclosures pertaining to scheme returns were also made voluntarily in various documents or disclosures by AMCs.

Commenting on the disclosure of information ratio, Sebi mentioned that AMFI shall ensure that such disclosure shall be available on its website in a comparable, downloadable (spreadsheet) and machine readable format and IR disclosure shall be applicable only for equity oriented schemes.

The circular mentioned the methodology for calculation of IR for each category of mutual fund schemes. In order to bring uniformity across different MFs, the following shall be taken into account for calculation of IR for equity oriented mutual fund schemes.

• IR shall be calculated as under:
  (Portfolio Rate of Returns less Benchmark Rate of Returns) / Standard Deviation of Excess Return
  Excess Return= Portfolio Rate of Returns less Benchmark Rate of Returns

• Benchmark used in the above formula shall be the Tier 1 benchmark currently used by the equity oriented Mutual Fund schemes.

• Volatility/Standard deviation shall be calculated on the basis of daily return values.

• Daily portfolio return shall be calculated using arithmetic function.

To ensure better understandability about IR by investors, AMCs and AMFI shall take adequate steps to educate investors about RAR, IR and about their significance in scheme performance evaluation. An allocation shall be earmarked from the budget for investor education, leveraging social/mass media channels to maximize the outreach and impact.Sebi has shared a link which is the format for disclosure of IR on the websites of AMCs and AMFI shall be accessed. In this format, a hyperlink to the AMFI website for the IR column shall be embedded, providing clear and concise explanation on the following, in easy-to-understand language on explaining IR, formula for calculation, and interpretation of IR with sufficient illustrations covering various scenarios.