Sharpe Ratio Explained: Are You Being Paid for the Risk?
4 min read · 2026-07-22
Two funds both returned 15%. One did it smoothly; the other swung wildly. The Sharpe ratio tells them apart.
The formula, in plain English Sharpe = (fund return − risk-free rate) ÷ volatility.
It measures how much extra return you earned for each unit of risk taken, above a safe ~6.5% government-bond rate. Higher is better.
How to read it - Above ~1.0: good risk-adjusted returns. - Above ~1.5: excellent. - Below ~0.5: the fund took on risk without enough payoff.
Why it matters A high headline return that came with huge volatility can be gut-wrenching to hold — and you may sell at the worst time. A high Sharpe means the ride was smoother for the return you got.
Sharpe is one input to our FundScore's risk-adjusted dimension. See it on every fund page, alongside Sortino and max drawdown.
Put this into practice
Find funds matched to your goal, or back-test a SIP on real NAVs.
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Educational content only — not investment advice. Mutual fund investments are subject to market risk; read all scheme-related documents carefully.