SEBI's New Risk-Adjusted Return Mandate: What It Means for DIY Investors

Information ratio mandate by Sebi boosts transparency and eases fund comparisons

- Saurabh Mittal

The Securities and Exchange Board of India (Sebi) released a consultation paper last June, emphasizing the importance of risk-adjusted return (RAR) in mutual fund investments, followed by a circular on 17 January, mandating MFs to disclose the information ratio (IR) of each portfolio on their websites daily, along with returns. The rule takes effect three months from its issue date. While this initiative aims to help investors make more informed decisions, a key question remains: will it truly benefit DIY (do-it-yourself) investors—those who manage their own portfolios without professional advisors—by enabling them to assess risk effectively and select the right funds?

Two MF schemes can generate identical returns yet offer vastly different experiences due to volatility, an accepted measure of risk. Evaluating returns without considering the risks taken to achieve them can be misleading. Several metrics exist to measure RAR—Sharpe, Treynor and Sortino ratios. Sebi mandated information ratio as the standardized metric for fund comparison.