Sortino Ratio — Mutual Fund Term Explained

Like Sharpe, but only penalises downside volatility. A better measure because upward swings are not a problem for investors.

The Sortino Ratio only considers downside deviation instead of total standard deviation. A fund that occasionally delivers very high returns would be penalised by Sharpe but not Sortino.

A higher Sortino Ratio is better.

Formula

Sortino Ratio = (Fund Return − Risk-Free Rate) ÷ Downside Deviation

Related terms

• Sharpe Ratio — Return per unit of total risk taken. Higher is better. Shows how much excess return you earn for each unit of volatility.
• Standard Deviation — How much a fund's monthly returns fluctuate around their average. Higher = more volatile = higher risk.
• Drawdown — The percentage decline from a fund's peak NAV to its subsequent trough. Shows how badly a fund fell from its high point.
• Maximum Drawdown — The largest peak-to-trough decline in a fund's history. Represents the worst-case loss an investor could have experienced.

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