Sharpe vs Sortino Ratio: What's the Difference?
Updated · FundLens research · not investment advice
The Sharpe ratio measures how much return a fund earned per unit of TOTAL volatility, while the Sortino ratio counts only DOWNSIDE volatility — the falls, not the rallies. Since investors only mind losses, Sortino is usually the better lens for judging an equity mutual fund; a Sortino above ~1.2 and a Sharpe above ~1.0 are solid for Indian equity funds.
What the Sharpe ratio tells you
Sharpe = (fund return − risk-free rate) ÷ standard deviation of returns. In India the risk-free rate is usually proxied by the 10-year G-Sec yield (~6.5%). A Sharpe of 1.2 means the fund earned 1.2 units of excess return for every unit of volatility it put you through.
Its blind spot: standard deviation treats a +8% month and a −8% month as equally 'risky'. A fund that surges often gets punished for good behaviour.
What the Sortino ratio fixes
Sortino replaces total volatility with downside deviation — volatility measured only on returns below a hurdle (typically the risk-free rate). It answers the question investors actually care about: how much return did I get for the losses I had to sit through?
Because upside swings aren't penalised, a fund's Sortino is normally higher than its Sharpe. A large gap between the two suggests the fund's volatility is mostly upside — a good sign.
Which should you use?
Use Sortino to compare funds within the same category, especially volatile ones like small caps, where big up-moves distort Sharpe. Use Sharpe when you want the stricter, more conservative test, or when comparing with older research that only reports Sharpe.
Best practice: look at both. A fund that ranks well on both Sharpe and Sortino is delivering genuine risk-adjusted performance, not just riding a bull run.
| Sharpe ratio | Sortino ratio | |
|---|---|---|
| Risk measured | Total volatility (up + down) | Downside volatility only |
| Punishes big up-moves? | Yes | No |
| Good value (Indian equity) | Above ~1.0 | Above ~1.2 |
| Best for | Conservative, like-for-like tests | Volatile categories (mid/small cap) |
Frequently asked questions
What is a good Sharpe ratio for a mutual fund in India?
For Indian equity funds, a 3-year Sharpe above ~1.0 is good and above ~1.5 is excellent. Between 0.5 and 1.0 is acceptable; below 0.5 means the risk wasn't well rewarded.
Why is a fund's Sortino ratio higher than its Sharpe ratio?
Because Sortino's denominator only includes downside volatility, which is a subset of the total volatility used by Sharpe. Same excess return ÷ smaller risk number = higher ratio.
Can a fund have a good Sharpe but a poor Sortino?
Yes — if most of its volatility is downside. That combination is a warning sign: steady-looking overall volatility that's concentrated in falls.
Where can I see Sharpe and Sortino for every Indian equity fund?
FundLens computes both from official AMFI daily NAV history for 680+ direct-growth equity and index funds, and folds them into a 0–100 Smart Score per category.