What is the Information Ratio?
Alpha tells you a fund beat its benchmark; Information Ratio tells you how reliably. It divides excess return (the fund’s return minus its benchmark’s) by tracking error (how much that excess return itself bounces around) - so a fund that beats its benchmark by a similar amount every year scores higher than one that beat it by more on average but with wildly inconsistent year-to-year gaps.
Information Ratio = (Rp − Rb) / Tracking Error
Higher is better - more consistent excess return per unit of tracking error. Negative means the fund lagged its benchmark on a risk-adjusted basis.
Real comparison across 6 funds
CHART
3Y Information Ratio - 6 real funds
Same 3-year window as the Sharpe/Sortino comparisons - here excess return is measured against each fund's own benchmark, not the risk-free rate.
Funds compared: Parag Parikh Flexi Cap · DSP Value · ICICI Prudential Value · SBI Focused · Parag Parikh ELSS Tax Saver · SBI Multicap
Reading the spread
Across these 6 funds, Information Ratio runs from -0.31 (Parag Parikh ELSS Tax Saver) to 0.81 (SBI Focused), a gap of 1.12. The middle value is 0.21, with 3 of 6 above it. Taking higher as better, SBI Focused leads and Parag Parikh ELSS Tax Saver trails on this measure alone.
How to use it in practice
Use the Information Ratio to see whether a manager’s outperformance is consistent. It divides excess return by tracking error, so a manager who beats the benchmark by a steady margin scores higher than one who gets there through a few lucky years. A ratio that stays positive across windows is a better sign of skill than a high ratio in a single window.
Common mistakes
Do not compare Information Ratios across categories or benchmarks, and be careful with very low tracking error, where a tiny excess return can give a large-looking ratio for a fund that is basically an index fund. As with all ratios built from past data, a short window makes it unreliable.
Frequently asked questions
What is a good Information Ratio?
A value above 0.5 is often called good and above 1 excellent, but these are rules of thumb. What counts is that the ratio stays positive across windows rather than appearing once.
How is the Information Ratio different from alpha?
Alpha shows the size of outperformance after adjusting for risk. The Information Ratio shows how consistently that outperformance was achieved, relative to the fund’s tracking error.
Why does tracking error matter here?
It is the denominator. Two funds with the same excess return will have different Information Ratios if one varied far more from its benchmark than the other.
WHAT THIS MEANS FOR YOU A fund can have positive Alpha but a low or negative Information Ratio if its outperformance was concentrated in one unusually good stretch rather than earned consistently - Information Ratio is the better single number for judging whether a manager’s edge looks repeatable.
METHODOLOGY Computed over a trailing 3-year window as of 2026-08-31, using each fund’s own benchmark for both excess return and tracking error. Data: Punji risk analytics. Not investment advice.