Information Ratio — Mutual Fund Term Explained

Measures how consistently a fund beats its benchmark per unit of active risk. Higher and more consistent is better.

The Information Ratio is the ratio of active return (outperformance vs benchmark) to tracking error. Tells you how consistently a manager can generate alpha.

IR above 0.5 is generally considered good. Unlike alpha, IR penalises inconsistency.

Formula

Information Ratio = Active Return ÷ Tracking Error

Related terms

• Alpha — The excess return a fund generates over its benchmark. Positive alpha means the manager added value beyond what the market delivered.
• Benchmark — The market index a fund is compared against. A fund manager must beat the benchmark consistently to justify active management fees.
• Tracking Error — For index funds: how closely the fund tracks its benchmark. Lower is better — high tracking error means the fund deviates from the index.
• Sharpe Ratio — Return per unit of total risk taken. Higher is better. Shows how much excess return you earn for each unit of volatility.

Browse the full mutual fund glossary, or see this concept in action in the fund screener.