Information Ratio
Is the fund manager's skill reliable — or just lucky?
What is it?
The Information Ratio (IR) measures how consistently a fund manager generates returns above the benchmark, relative to how much their returns deviate from the benchmark (Tracking Error). It rewards consistent outperformance and penalises inconsistency.
A high IR means the manager reliably beats the benchmark by a meaningful margin. A low or negative IR means any outperformance is erratic — the manager might have great years followed by terrible ones that wash out the gains.
The IR is especially useful for identifying truly skilled managers. A manager who consistently adds 2% above benchmark (IR = 0.8) is often more valuable than one who adds 5% some years but loses 2% in others (IR = 0.3).
Formula
Information Ratio = (Rp − Rb) ÷ Tracking ErrorRpFund's returnRbBenchmark returnTracking ErrorStandard deviation of (Rp − Rb) over timeReal Example
A flexi-cap fund over a 5-year rolling window.
Given
Calculation
Active Return = 15.5 − 12.0 = 3.5% Information Ratio = 3.5 ÷ 3.5 = 1.0
What this means
An IR of 1.0 is strong — this fund consistently generates alpha at a level where the outperformance is as large as its variability, suggesting skill rather than luck.
Good vs Bad Benchmarks
Above 1.0
Highly skilled, consistent manager — alpha is reliable
0.5 – 1.0
Manager adds value more often than not — worth the active fee
0 – 0.5
Some value added but inconsistently — borderline active vs passive
Below 0
Persistent underperformance — consider switching to an index fund
Check this ratio for a real fund
MFLens shows Information Ratio across 1Y / 3Y / 5Y / 7Y / 10Y rolling windows for every Indian mutual fund.
Rolling metrics on MFLens show how each ratio evolves across all historical windows of the selected period. This provides consistency insights beyond traditional trailing calculations. For informational purposes only — not financial advice.