What is information ratio of a mutual fund?
It measures how consistent a fund’s performance has been. In the numerator of this ratio, the return of the index is subtracted from the fund’s return, thereby getting a measure of the excess return that it has generated.
In the denominator is the tracking error, which is the standard deviation of the difference between the return of the portfolio and the return of the index.
How can investors use it?
Higher the ratio, greater is the fund’s consistency. The latter is desirable because it is easier for investors to stick to funds
