Here's the reading map, shortest to deepest:
Most investors look at raw returns. That's the wrong lens.
The correct question is: "How much alpha is the manager generating per unit of active risk taken?" This is the IR) — definition">Information Ratio (IR):
$$IR = \frac{E[\alpha]}{TE}$$
where $E[\alpha]$ is the active return above the benchmark and $TE$ is Tracking Error — definition">tracking error (Volatility) — definition">Standard Deviation (Volatility) — definition">standard deviation of that active return). [8]
A fund beating Nifty by 3% with 12% tracking error (IR = 0.25) is far less impressive than one beating by 3% with 4% tracking error (IR = 0.75). Same alpha, one-third the active risk. [8]
| Question | Metric |
|---|---|
| Is my whole portfolio earning enough for its total risk? | Sharpe Ratio |
| Is this one active fund justifying its fees? | Information Ratio |
| How much raw excess return did the manager deliver? | Alpha |
The practical rule: Use Sharpe for your overall portfolio. Use IR to decide which active funds belong in it. [9]
Before evaluating equity funds, verify your debt allocation is correctly matched to its purpose — emergency buffer, medium-term goal, or long-term diversification. Each has a different instrument. Mixing them up means your "safe" allocation can fall 8–10% in a rising rate environment. [3]
A 1% annual fee, over 30 years at 8% returns, reduces your ending corpus by roughly 25%. This is the core case for checking whether regular-plan expense ratios are justified by the IR the manager is actually delivering. [4]
Apply this → Goal Planner to cross-check whether your current funds' expected returns are sufficient for your goals, or India Macro Dashboard to sense-check your allocation against the current cycle.