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Investment Fund Ratios that You Should Analyze

Investment fund ratios inform us, in greater detail, of all the factors that affect us as participants. How to read these ratios?

When we look at the table corresponding to investment funds in the financial press, we obtain information about the name of the fund, the management company, its returns in different time periods, etc. However, to evaluate a fund in a more complete way, it is necessary to go one step further. For this purpose, a series of typical portfolio management ratios are used; These are mutual fund ratios.

Let us remember that an investment fund is nothing more than a portfolio of assets, which belongs to a group of investors and is managed by a management company. Now the questions are: Is said portfolio well composed? Is it behaving correctly? Mutual fund ratios provide us with the answer.

It is a series of mathematical formulas designed to relate different background factors. In this way, more information is obtained about the manager’s work, the risk-adjusted return and the evolution of the fund with respect to the market. All these ratios can be obtained from the fund file itself, that is, they are available to the investor even before being a participant in an investment fund.

Most significant investment fund ratios

Here we describe some of the most prominent investment funds

Jensen’s Alpha

Jensen’s Alpha ( or simply Alpha) informs us of the good or bad management of the fund. In other words, if the manager has carried out his work well. Basically, the investor must keep in mind that the higher the Alpha of an investment fund, the greater the value that management provides. Of course, a negative Alpha is a bad sign.

The Alpha simply calculates the difference between the return of the investment fund (the portfolio made up by the manager) and the return of the market (the reference index).

If the fund is managed appropriately, selecting the best stocks and excluding those with the worst performance, naturally, the fund’s results will be better than those of the reference index. The Alpha measures the part of the profitability that does not depend on the evolution of the market, but on the work of the manager.

When we value the work of the manager, the question we must ask ourselves is: are the management fees applied by the fund appropriate ?


The beta of an investment fund is important because it indicates its behavior in relation to its reference market. In other words, if the market fluctuates by 100 points, how many points does our fund have the capacity to move? This is known as the fund’s sensitivity to the market.

If the beta is equal to 1, it means that the fund moves in harmony with its reference index. In this case, if the market moves 10% up, the net asset value of the mutual fund’s shares will be 10% higher in value. If it is greater than 1, the fund will fluctuate more violently than the market. The opposite happens if the beta is less than 1, the fund is more “ calm ” than the market.

A fund with a high beta has the ability to outperform the market, but it also represents a higher risk.

Sharpe ratio

How many points of return will we obtain for each point of risk that we assume? This is what the Sharpe ratio tells us .

The difference in profitability between the investment fund and an asset considered risk-free is calculated , taking into account the volatility of the fund (as a measure of risk). In this way, we are able to know what is the extra return that the fund obtains in relation to the risk that it assumes.

As a general rule, the public debt of the country with the most assets in the fund’s portfolio is taken as risk-free assets.

The higher the Sharpe ratio, the higher the return of the fund in relation to the risk it assumes. If it is negative, it is a bad sign: it means that its return is lower than risk-free assets.

Watch out! The Sharpe ratio may be positive, but less than 1. This should be read as the fund underperforming the risk we are taking.

Thanks to the Sharpe ratio, the participant can compare different funds in the same category and know which of them provides a higher return for a similar risk. In addition, it allows you to deduce whether the investment is appropriate from a risk/return point of view.

Tracking error

The tracking error provides information on the level of activity in the management of the fund. It is also known as “manager risk” because it determines the manager’s freedom to separate himself from his reference index, to a greater or lesser extent.

The higher the tracking error, the more active the fund will be : the manager moves further away from its reference index. We will have to compare this measure with the other investment fund ratios.

We could define the tracking error as the stability or volatility index of an investment fund in relation to its benchmark. It is a measure of relative risk.

Tracking error is especially useful for comparing index funds . A high value in this type of fund means that the manager has taken risks with management away from the market.

Information ratio

The information ratio is a measure of risk-adjusted return. It relates the manager’s work compared to the behavior of the market, just like the alpha, except that in this ratio the level of activity of the fund is taken into account , measured by the tracking error.

It is better for an investment fund that this ratio is as high as possible. It means that the activity of the manager (the manager risk or tracking error) is rewarded with higher returns. But, be careful, it does not mean that the fund is safe either: it simply tells us that it obtains a higher return than the reference index.

If the Alpha informs us of the excess return obtained by the manager’s work (and not by the behavior of the market), the information ratio tells us the quality of said excess, because the risk assumed by the manager is taken into account .

Treynor index

This ratio is important to know how much return the investment fund has earned in relation to the risk it assumes, except that this ratio takes into account the systematic risk (market risk in its entirety), measured by the beta.

It is calculated simply by subtracting the interest rate on risk-free assets from the fund’s return and dividing the result by the beta.

Systematic risk cannot be eliminated by diversification (the specific risk of an asset is eliminated, but not the risk of the market as a whole). Taking this risk as a measure to calculate adjusted return means assuming that the managers have correctly diversified the portfolio. Therefore, the higher its value, the more effective the manager’s work is.

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