A risk-adjusted performance metric that measures excess return per unit of total risk (standard deviation).
The Sharpe Ratio, developed by Nobel laureate William Sharpe, tells you how much excess return you're earning for each unit of risk you take. It normalises returns for risk, making it possible to compare funds with different risk profiles on equal footing.
Two funds both return 15%. Fund A has low volatility; Fund B is highly volatile. Fund A has a higher Sharpe Ratio — it achieved the same return with less risk. The Sharpe Ratio rewards funds that generate good returns without taking excessive risk.
Calculate the fund's return minus the risk-free rate (e.g., 7% for India).
Divide the result by the fund's standard deviation (volatility).
A higher number means better risk-adjusted returns.
Sharpe Ratio is typically compared for funds within the same category.
Sharpe Ratio = (Rp − Rf) ÷ σp