Sharpe ratios: which equity funds paid best for risk

Return per unit of risk

A fund that returned 18% a year while barely swinging is a different thing from one that returned 18% a year on a roller coaster. The Sharpe ratio is the standard way to tell them apart.

Over the three years to 8 July 2026, the median diversified equity fund had a Sharpe ratio of 0.57. The highest was 1.22, for Bandhan Small Cap.

We compute it as the three-year compound annual return minus a 6.5% risk-free rate, divided by the annualised volatility of daily returns over the same three years. The figures cover each fund's Direct plan, Growth option, with NAVs to Wednesday 8 July, and only the 254 diversified equity funds with a full three-year record.

Same return, different ride

The clearest way to see what the ratio does is to hold the return still.

Three funds, within 0.03 points of each other on return. DSP Value got there with about two-thirds of the volatility, and its Sharpe ratio is half as high again as the other two.

By category

The order of the categories follows the order of their returns almost exactly. Volatility varies far less between categories, from about 13% to 17%, than returns do, from about 11% to 20%. So over these three years, the categories that returned most also scored best on risk-adjusted return, despite swinging more.

The top ten

Eight of these ten are also among the ten highest three-year returns. The two that are not are DSP Value, which is here on the strength of low volatility rather than high return, and Invesco India Focused. Invesco India runs four of the ten.

At the bottom, Samco ELSS Tax Saver is the only diversified fund with a negative ratio, −0.06: its 5.49% a year is below the 6.5% risk-free rate. Mirae Asset Focused (0.11) and Navi ELSS Tax Saver Nifty 50 Index (0.14) come next.

The Navi fund is a Nifty 50 index fund, and a plain one scores the same: UTI Nifty 50 Index has a Sharpe ratio of 0.14, from 8.34% a year at 13.19% volatility. 251 of the 254 diversified funds beat it.

What this does not tell you

Volatility is not the only risk. The Sharpe ratio treats a sharp rise as just as "risky" as a sharp fall, and says nothing about how deep the worst fall was.

The risk-free rate is a choice. At a different rate every ratio moves, though the order barely changes.

It describes three good years for mid caps. In a period when they fall, the same volatility would come with lower returns, and the ranking would look different. None of this is advice to buy or sell any fund.

Where to go from here

Risk-adjusted returns explains the Sharpe ratio alongside its cousins, and Treynor and the information ratio covers two more. The Sortino stars screen ranks funds on downside risk only, and high-Sharpe small caps filters the small-cap list.

For the volatility side alone, see fund volatility by category.