12.6 Quantitative Measures of Fund Manager Performance

NISM-Series-V-A: Mutual Fund Distributors Certification Examination Exam

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1 Chapter 1: Introduction & Exam Overview

1.1 About the NISM-Series-V-A Examination 1.2 The 12-Unit Curriculum Map and a Study Plan

2 Chapter 2: Investment Landscape

2.1 Investors and Their Financial Goals 2.2 Savings or Investments? 2.3 Different Asset Classes 2.4 Investment Risks 2.5 Risk Measures and Management Strategies 2.6 Behavioural Biases in Investment Decision Making 2.7 Risk Profiling 2.8 Asset Allocation and Do-It-Yourself versus Professional Help

3 Chapter 3: Concept and Role of a Mutual Fund

3.1 Concept of a Mutual Fund 3.2 Classification of Mutual Funds 3.3 Growth of the Mutual Fund Industry in India

4 Chapter 4: Legal Structure of Mutual Funds in India

4.1 Structure of Mutual Funds in India 4.2 Key Constituents of a Mutual Fund 4.3 AMC Organisation Structure and Service Providers 4.4 Role and Function of AMFI

5 Chapter 5: Legal and Regulatory Framework

5.1 Role of Regulators in India 5.2 Role of SEBI and the Mutual Fund Regulations 5.3 Due Diligence Process by AMCs for Distributors 5.4 Investor Grievance Redress Mechanism 5.5 AMFI Code of Conduct for Intermediaries

6 Chapter 6: Scheme Related Information

6.1 Mandatory Documents I: Scheme Information Document and Statement of Additional Information 6.2 Mandatory Documents II: Key Information Memorandum and the Advertisement Code 6.3 Non-Mandatory Disclosures

7 Chapter 7: Fund Distribution and Channel Management Practices

7.1 The Role and Importance of Mutual Fund Distributors 7.2 Different Kinds of Mutual Fund Distributors 7.3 Modes of Distribution 7.4 Pre-requisites to Become a Distributor of a Mutual Fund 7.5 Revenue for a Mutual Fund Distributor 7.6 Commission Disclosure Mandated by SEBI 7.7 Distributors versus Investment Advisers, Nomination Facilities and Change of Distributor

8 Chapter 8: Net Asset Value, Total Expense Ratio and Pricing of Units

8.1 Fair Valuation Principles 8.2 Computation of Net Assets of a Scheme and NAV 8.3 Dividends and Distributable Reserves 8.4 Entry and Exit Load and Its Impact on NAV 8.5 The Expense Ratio Framework: Base Expense Ratio, Brokerage and Statutory Levies 8.6 Key Accounting and Reporting Requirements 8.7 NAV, Total Expense Ratio and Pricing of Units for the Segregated Portfolio

9 Chapter 9: Taxation

9.1 Applicability of Taxes in Respect of Mutual Funds 9.2 Capital Gains on Mutual Fund Units 9.3 Dividend (IDCW) Income and Tax Deducted at Source 9.4 Stamp Duty and Securities Transaction Tax on Mutual Fund Units 9.5 Setting Off Capital Gains and Losses under the Income Tax Act 9.6 Tax Benefit under Section 80C and Applicability of GST

10 Chapter 10: Investor Services

10.1 The New Fund Offer Process 10.2 New Fund Offer Price and Ongoing Offer Price for Subscription 10.3 Investment Plans and Services 10.4 Allotment of Units and Account Statements 10.5 Mutual Fund Investors: Who Can Invest 10.6 Filling the Application Form for Mutual Funds 10.7 Financial Transactions with Mutual Funds 10.8 Cut-Off Time and Time Stamping 10.9 KYC Requirements for Mutual Fund Investors 10.10 Systematic Transactions and Their Operational Aspects 10.11 Non-Financial Transactions, Special Investor Categories and Turnaround Times

11 Chapter 11: Risk, Return and Performance of Funds

11.1 General and Specific Risk Factors 11.2 Factors That Affect Mutual Fund Performance 11.3 Drivers of Returns and Risk in a Scheme 11.4 Measures of Returns 11.5 SEBI Norms Regarding Representation of Returns 11.6 Risks in Fund Investing: The Investor's Perspective 11.7 Measures of Risk and Provisions Relating to Credit Risk

12 Chapter 12: Mutual Fund Scheme Performance

12.1 Benchmarks and Performance 12.2 Price Return Index or Total Return Index 12.3 Basis of Choosing an Appropriate Performance Benchmark 12.4 Benchmarks for Equity Schemes 12.5 Benchmarks for Debt Schemes and Other Schemes 12.6 Quantitative Measures of Fund Manager Performance 12.7 Tracking Error and Scheme Performance Disclosure

13 Chapter 13: Mutual Fund Scheme Selection

13.1 Scheme Selection Based on Investor Needs, Preference and Risk Profile 13.2 Risk Levels in Mutual Fund Schemes 13.3 Scheme Selection Based on Investment Strategy 13.4 Selecting a Scheme Across AMCs or Within a Scheme Category 13.5 Selecting Options in Mutual Fund Schemes and Do's and Don'ts

12.6 Quantitative Measures of Fund Manager Performance

Key Takeaways Explain This Topic AI

Sharpe ratio measures excess return per unit of total risk, using standard deviation.

Treynor ratio measures excess return per unit of market risk, using beta.

Jensen's alpha measures the return earned above what beta alone would predict.

Sharpe suits a scheme held as the whole portfolio; Treynor suits one held alongside others.

All three ratios are comparable only within a category and over identical periods.

Last updated: August 2026

Return Alone Is Not Performance

A scheme returning 21% while another returned 16% has not necessarily been better managed. If the first took far more risk to achieve it, the investor was compensated for risk rather than served by skill. Risk-adjusted measures ask whether the return justified the risk.

Sharpe Ratio Sharpe Ratio = (Portfolio Return - Risk-Free Rate) / Standard Deviation

It measures excess return per unit of total risk . The numerator is the return above what a risk-free instrument would have earned; the denominator is total volatility.

Worked example. Scheme A: return 21%, standard deviation 24%, risk-free rate 6.5%
Sharpe = (21 - 6.5) / 24 = 0.60

Scheme B: return 16%, standard deviation 13%, risk-free rate 6.5%
Sharpe = (16 - 6.5) / 13 = 0.73

Scheme B has the better risk-adjusted performance despite the lower absolute return. It delivered more excess return for each unit of volatility its investors experienced.

A higher Sharpe ratio is better. Because it uses total risk , Sharpe is the appropriate measure when the scheme is the investor's entire portfolio, where every source of volatility is felt.

Treynor Ratio Treynor Ratio = (Portfolio Return - Risk-Free Rate) / Beta

Identical in structure, but the denominator is beta rather than standard deviation, so it measures excess return per unit of market risk only.

Worked example. Scheme A: return 21%, beta 1.20, risk-free rate 6.5%
Treynor = (21 - 6.5) / 1.20 = 12.08

Scheme B: return 16%, beta 0.85, risk-free rate 6.5%
Treynor = (16 - 6.5) / 0.85 = 11.18

On this measure Scheme A looks better, which is the reverse of the Sharpe conclusion. The difference is instructive: Scheme A carries volatility beyond what its market exposure explains — concentration or style — and Sharpe penalises that while Treynor does not.

When to use which:

Situation Measure
The scheme is the investor's whole portfolio Sharpe , since total risk is what the investor bears

The scheme is one holding among several well-diversified ones Treynor , since unsystematic risk is diversified away at portfolio level

Jensen's Alpha Alpha = Actual Return - [ Risk-Free Rate + Beta x (Benchmark Return - Risk-Free Rate) ]

Alpha measures the return earned above what the scheme's beta alone would predict . It is the most direct quantitative expression of manager skill.

Worked example. Actual return = 18.0%
Risk-free rate = 6.5%
Beta = 0.90
Benchmark return = 14.0%

Expected return = 6.5 + 0.90 x (14.0 - 6.5)
= 6.5 + 0.90 x 7.5
= 6.5 + 6.75
= 13.25%

Alpha = 18.0 - 13.25 = +4.75%

The manager delivered 4.75 percentage points more than the scheme's market exposure would have produced. Positive alpha indicates value added; negative alpha indicates value destroyed.

A caution the exam expects: alpha computed from a short period or against an inappropriate benchmark is unreliable, and a positive alpha over one year is far weaker evidence than a consistently positive alpha across a full cycle.

Information Ratio Information Ratio = (Portfolio Return - Benchmark Return) / Tracking Error

Measures excess return per unit of active risk — how much outperformance the manager generated for each unit of deviation from the benchmark. It is the natural measure for an actively managed scheme judged against its index, and a higher ratio indicates more efficient use of the freedom to deviate.

Sortino Ratio

A refinement of Sharpe that uses only downside deviation in the denominator, on the reasoning that investors do not object to upside volatility. Useful where a scheme's return distribution is asymmetric.

Using the Measures Correctly

Four rules govern all of them:

Compare within a category only. A liquid fund's Sharpe ratio and a small cap fund's Sharpe ratio are not comparable, because the risk-free rate and the nature of the risk differ fundamentally.

Use identical periods. A three-year Sharpe and a five-year Sharpe describe different market environments.

Use a sufficient period. These are statistical measures, and short samples are unstable. Three years is a minimum.

Read them together. A high Sharpe with a low alpha, or a high alpha with a very high tracking error, each tells a story the single number does not.

Summary

Measure Denominator Answers
Sharpe Standard deviation Excess return per unit of total risk
Treynor Beta Excess return per unit of market risk
Jensen's Alpha None; it is a difference Return above what beta predicts
Information Ratio Tracking error Excess return per unit of active risk
Sortino Downside deviation Excess return per unit of downside risk