Information Ratio Guide
Published 2026-02-09. Last updated 2026-04-17. Editorial review: Know Your PMS editorial standards. By Abhimanyu Kucheria for Know Your PMS.
Topic cluster: Risk & Return Metrics
Headline CAGR hides the journey. This cluster explains drawdowns, volatility, rolling returns, capture ratios, and risk-adjusted measures — with Indian PMS factsheet context.
Pillar guide: Max Drawdown Explained
More in this cluster:
- Max Drawdown Explained
- Volatility Explained
- Rolling Returns Guide
- Calmar Ratio Guide
- Capture Ratios Guide
What it means (plain English)
The information ratio (IR) divides active return (portfolio minus benchmark) by tracking error (volatility of that difference). IR ≈ 0.5 means you earn 0.5 units of excess return per unit of active risk—higher is better for benchmark-aware mandates.
Indian PMS marketed as 'benchmark plus' should show respectable IR over 36+ months—not just one lucky year. Low tracking error with tiny active return yields low IR; high active return with wild tracking error may still show moderate IR.
IR complements alpha and Sharpe. It punishes inconsistent relative performance. A manager beating Nifty by 3% one year and lagging 4% the next looks worse than steady 1% beats.
Tracking error calculation requires aligned benchmarks and monthly data. Custom benchmarks complicate IR—ensure comparability across schemes.
Worked example (Indian PMS scenario)
Relative to Nifty 500 TRI, PMS generates active return of 4% annualised with tracking error of 6%. Information ratio ≈ 0.67. Peer averages 3% active return, 9% tracking error → IR ≈ 0.33.
IR rewards consistency of outperformance per unit of active risk. A thematic PMS with IR 0.9 over 48 months beat the benchmark in 30 of 48 months—worth the 7% tracking error if you wanted that tilt. A closet indexer at 1.5% active, 3% TE might show IR 0.5 with lower fees via MF.
On ₹2 crore, 1% higher net IR sustained over 5 years is material—but only if tracking error matches your risk budget. Family offices often cap TE at 5% for core equity sleeves; aggressive satellites accept 10–12%.
Why it matters for PMS scheme selection
Information ratio rewards consistent benchmark-beating—not one heroic year and three mediocre ones.
See the complete PMS evaluation framework
- Ideal metric for relative-return PMS mandates
- Penalizes volatile active bets vs steady edge
- Pairs tracking error with active return clearly
- Supports institutional-style manager evaluation
- Differentiates closet indexers from true active
How to interpret it (practical checklist)
- Confirm benchmark matches mandate
- Use 36–60 months of monthly returns
- Compute or verify tracking error definition
- Compare IR across peer group on same index
- Read IR alongside up/down capture
- Check if fees reduce active return used in IR
- Avoid IR on windows with benchmark changes
Explore related metrics · Compare PMS schemes · Information Ratio
Common pitfalls (how this gets misused)
Read our methodology for assumptions and limitations.
- High IR from short samples or low TE flukes
- Mismatched benchmarks inflating active return
- Ignoring absolute return if IR looks good
- Comparing IR across price vs TRI benchmarks
- Closet indexing with artificially low TE
- Treating IR as predictive without process view
Related metrics to review together
Use this guide alongside these metrics to avoid one-number decision-making:
Related guides
See also
FAQs
What IR is good for Indian large-cap PMS?
Rough guide: IR above 0.4–0.5 over 5 years suggests meaningful consistent active management. Context matters—verify with alpha, holdings, and fees.
How is IR different from Sharpe?
Sharpe uses total volatility vs risk-free rate. IR uses tracking error vs benchmark—active risk only. Use IR for relative mandates, Sharpe for absolute risk view.
Can IR be gamed?
Managers can hug benchmark to lower TE while claiming positive IR on tiny active return. Check active return magnitude, not IR alone.
Next: How to compare PMS schemes · Compare schemes · All guides
Frequently asked questions
- What IR is good for Indian large-cap PMS?
- Rough guide: IR above 0.4–0.5 over 5 years suggests meaningful consistent active management. Context matters—verify with alpha, holdings, and fees.
- How is IR different from Sharpe?
- Sharpe uses total volatility vs risk-free rate. IR uses tracking error vs benchmark—active risk only. Use IR for relative mandates, Sharpe for absolute risk view.
- Can IR be gamed?
- Managers can hug benchmark to lower TE while claiming positive IR on tiny active return. Check active return magnitude, not IR alone.