Mutual Fund SIP Returns are subject to market risk as it is an indirect equity exposure. Hence tax and investment experts advise investors to look at different angles while choosing a mutual fund SIP plan for investment. He said that looking at the annual returns of a scheme over the years, an investor gets a bunch of mutual fund schemes to choose from, but it is a bit difficult to choose the best one among them. To clear this confusion, experts advise investors to apply the Sharpe Ratio formula on the available schemes as the Sharpe Ratio in Mutual Funds helps an investor to earn more on his money with less risk.
Speaking on Sharpe Ratio in Mutual Fund SIPs; Pankaj Mathpal, MD & CEO, Optima Money Managers, said, “The Sharpe Ratio in Mutual Fund SIPs is used to calculate the risk-adjusted returns of a Mutual Fund SIP plan. Basically, it informs an investor about this. How much additional return he will get. Keeping a risky asset, it becomes quite easy for a potential investor, if he has to choose one of the mutual fund schemes, which have given almost equal returns to their investors over the years. He said that Sharpe Ratio in mutual funds gives a fair idea about the risk-adjusted returns by the scheme as there is a limit beyond which one should refrain from taking more risk than the risk-free return.
How to use Sharpe Ratio Formula in Mutual Fund Schemes; Sebi registered tax and investment expert Jitendra Solanki said, “This formula should be used while comparing mutual fund schemes of the same category. Comparing mutual fund plans of mid-cap segment to a small-cap segment is of no use Before applying this formula, one needs to ensure that the schemes compared are from the same category.”
Sharpe Ratio vs Treynor Ratio
SEBI registered experts advised mutual fund investors to apply Treynor Ratio formula as well. He said that the Sharpe Ratio informs the investor about the risk-adjusted returns while the Treynor Ratio in mutual funds informs about the market volatility-adjusted returns. Since, mutual fund investments are subject to market risk, one must also check the Treynor ratio while comparing mutual fund schemes. Solanki also said that the formula is good for both lump sum and SIP investments. Hence, both types of mutual fund investors are advised to apply the Sharpe Ratio Formula and Treynor Ratio Formula before deciding the mutual fund scheme for investment.
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