No large-cap fund reached Sharpe ratio of 1; several mid and small caps delivered stronger risk-adjusted returns

After analysing large-cap funds on Value Research, none was found to have touched a Sharpe ratio of 1. The Sharpe ratio measures how efficiently a mutual fund has generated returns relative to the volatility or risk it assumes.

By contrast, several mid-cap and small-cap funds reported Sharpe ratios above 1, indicating stronger risk-adjusted performance.

Sharpe ratio measures risk-adjusted returns

The Sharpe ratio is a measure of a mutual fund’s risk-adjusted performance. It shows how much excess return (return above the risk-free rate) a fund has generated for every unit of risk (volatility) it has taken.

Sharpe Ratio = (Fund Return − Risk-free Rate) ÷ Standard Deviation

For example, suppose Fund A and Fund B both deliver an annualised return of 14%, while the risk-free rate is 7%. However, Fund A has a standard deviation (volatility) of 12%, whereas Fund B has a much lower standard deviation of 6%.

Using the formula, Fund A’s Sharpe ratio is 0.58, while Fund B’s ratio is 1.17.

Although both funds generated the same annual return, Fund B has a higher Sharpe ratio because it achieved those returns with lower volatility.

This means Fund B generated more than one unit of excess return for every unit of risk taken, whereas Fund A generated less than one unit of excess return for each unit of risk.

Among the large-cap funds, WhiteOak Capital Large Cap Fund recorded the highest Sharpe ratio at 0.64. It was followed by Nippon India Large Cap Fund at 0.60 and ICICI Prudential Large Cap Fund at 0.59.

Bank of India Large Cap Fund and DSP Large Cap Fund each reported a Sharpe ratio of 0.58.

Despite leading the category, none of these large-cap funds recorded a Sharpe ratio of 1 or above.

Among all mid-cap funds, three have a Sharpe ratio of more than 1.

HSBC Midcap Fund and WhiteOak Capital Mid Cap Fund recorded the highest Sharpe ratios at 1.05% each, while Invesco India Mid Cap Fund reported a Sharpe ratio of 1.01%.

It indicates that these funds generated more than 1 unit of excess return per unit of risk taken, based on historical performance.

In the small-cap category, two funds have Sharpe ratios greater than 1.

Bandhan Small Cap Fund reported the highest Sharpe ratio at 1.05%, while ITI Small Cap Fund followed with 1.01%.

Disclaimer: This is purely for educational/ informational purposes and should not be taken as any sort of investment advice. Always consult a SEBI-registered advisor before making any investment decisions.