Sharpe Ratio
How much return are you getting for every unit of risk?
What is it?
The Sharpe Ratio answers a simple question: for every unit of risk you take, how much return are you getting? A fund that returns 15% but swings wildly may actually be worse than one that returns 12% with smooth, steady gains.
It subtracts the risk-free rate (what you could safely earn in government bonds โ around 6.5% in India) from the fund's return, then divides by the fund's standard deviation. The result tells you how much excess return you get per unit of volatility.
When comparing two funds with similar returns, the one with the higher Sharpe Ratio is the better choice โ it delivers those returns with less turbulence.
Formula
Sharpe Ratio = (Rp โ Rf) รท ฯpRpFund's annualised returnRfRisk-free rate (โ 6.5% in India)ฯpStandard deviation of fund returnsReal Example
Evaluating a large-cap fund over the last 5 years.
Given
Calculation
Sharpe Ratio = (14.5 โ 6.5) รท 10.0 = 8.0 รท 10.0 = 0.80
What this means
A Sharpe of 0.80 means the fund earns 0.80 units of excess return for every unit of risk. Acceptable for a large-cap fund, but there is room for improvement.
Good vs Bad Benchmarks
Above 1.5
Outstanding risk-adjusted return โ the fund is highly efficient
1.0 โ 1.5
Better than average โ solid risk-adjusted performance
0.5 โ 1.0
Acceptable, but check if the returns justify the volatility
Below 0.5
Poor risk-adjusted return โ too much risk for too little reward
Check this ratio for a real fund
MFLens shows Sharpe 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 โ not financial advice.