Mutual funds SIP: How to earn more with lesser risk. Details here
- Mutual funds SIP: Tax and investment advisors suggest investors to apply sharpe ratio formula on the available plans as sharpe ratio in mutual funds helps an investor to earn more on one's money with lesser risk
Mutual funds SIP return is subject to market risk as it is an indirect equity exposure. That's why tax and investment experts advise investors to look at various angles while a choosing mutual funds SIP plan for investment. They said that looking at the annualized return of a plan in last few years gives an investor make a bunch of select mutual fund plans, but to pick the best among them is slightly tricky. To overcome this confusion, experts advised investors to apply sharpe ratio formula on the available plans as sharpe ratio in mutual funds helps an investor to earn more on one's money with lesser risk.
Speaking on sharpe ratio in mutual funds SIP; Pankaj Mathpal, MD & CEO at Optima Money Managers said, "Sharpe ratio in mutual funds SIP is used to calculate the risk-adjusted return of a mutual fund SIP plan. Basically, it informs an investor about how much extra return it would receive on holding a risky asset. It become quite handy for a potential investor if he or she has to choose any one of the mutual funds plans that have yielded almost same return to its investors in last few years." He said that sharpe ratio in mutual funds give fair idea about the risk-adjusted return by a plan because there is a limit beyond which taking risk for more than risk-free return should be kept at bay.
On how to use sharpe ratio formula in mutual fund plans; SEBI registered tax and investment expert Jitendra Solanki said, "One should use this formula while comparing mutual fund plans of the same category. Using sharpe ratio formula while comparing a mutual fund plan of mid-cap segment with other mutual fund plan of a small-cap segment is of no use. Before implementing this formula, one needs to make sure that the plans compared are from the same category."
Sharpe ratio vs treynor ratio
The SEBI registered experts advised mutual fund investors to apply treynor ratio formula too. He said that sharpe ratio informs investor about the risk-adjusted return while treynor ratio in mutual funds inform about market volatility-adjusted return. Since, mutual fund investments are subject to market risk, one should check treynor ratio too while comparing a mutual fund plan. Solanki also maintained that the formula holds well for both lump sum and SIP investment. So, both types of mutual fund investors are advised to apply sharpe ratio formula and treynor ratio formula before deciding a mutual fund plan for investment.
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First Published:22 Jan 2022, 11:14 AM IST
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