The SIP return of mutual funds is subject to market risk as it is an indirect exposure to equities. This is why tax and investment experts advise investors to look at different angles while choosing a mutual fund SIP plan for investing. They said looking at a plan’s annualized return over the past few years allows an investor to create a select set of mutual fund plans, but it’s a little tricky to choose the best one. between them. To overcome this confusion, experts have advised investors to apply the sharpe ratio formula on available plans because the sharpe ratio in mutual funds helps an investor earn more from their money with less risk.
Speaking on the sharpe ratio in SIP mutual funds; Pankaj Mathpal, MD and CEO of Optima Money Managers, said, “The Sharpe ratio in SIP mutual funds is used to calculate the risk-adjusted return of a mutual fund SIP plan. Basically, it informs an investor about the additional return he would receive on holding a risky asset.It becomes very convenient for a potential investor if he has to choose one of the mutual fund plans that have brought almost the same return to his investors He said the sharpe ratio in mutual funds gives a fair idea of a plan’s risk-adjusted return because there is a limit beyond which risk taking for a return higher than the risk-free return must be kept at a distance.
On how to use the sharpe ratio formula in mutual fund schemes; Jitendra Solanki, a SEBI-registered tax and investment expert, said, “One should use this formula while comparing mutual fund plans of the same category. Using the sharpe ratio formula while comparing a mutual fund plan Mid-cap segment mutual funds with another mutual fund plan from a small-cap segment is useless.Before implementing this formula, make sure that the plans being compared are of the same category.”
Sharpe’s report versus Treynor’s report
SEBI-registered experts have advised mutual fund investors to also apply the Treynor ratio formula. He said that the sharpe ratio informs the investor about risk-adjusted return, while the treynor ratio in mutual funds informs about volatility-adjusted return in the market. Since mutual fund investments are subject to market risk, it is also worth checking the Treynor ratio while comparing a mutual fund plan. Solanki also argued that the formula works well for lump sum and SIP investments. So, both types of mutual fund investors are advised to apply the sharpe ratio formula and the treynor ratio formula before deciding on a mutual fund plan for the investment.
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