The Sharpe Ratio is a widely used measure of risk-adjusted return that quantifies how much excess return an investment generates per unit of total risk (measured by standard deviation). It is calculated as: Sharpe Ratio = (Portfolio Return – Risk-Free Rate) ÷ Standard Deviation of Portfolio Returns. A higher Sharpe Ratio indicates better risk-adjusted performance — the portfolio is delivering more return for each unit of risk taken. In India, the risk-free rate is typically approximated by the 91-day Treasury Bill yield or the RBI repo rate. For mutual fund evaluation, SEBI requires AMCs to disclose the Sharpe Ratio in fund fact sheets. A Sharpe Ratio above 1.0 is generally considered good, above 2.0 is very good, and above 3.0 is excellent. However, the Sharpe Ratio has limitations — it assumes returns are normally distributed and treats upside and downside volatility equally, which may not reflect the true risk-return experience of investors in volatile Indian equity markets.
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