Why a benchmark exists
A fund that returned 14% sounds good until you learn its index returned 17%. A benchmark gives the return a passive investor would have earned in the same category, so you can judge the manager's contribution after costs.
TRI vs price index
A price index tracks only the movement of share prices. A Total Return Index (TRI) also assumes dividends are reinvested. Because a fund's NAV includes dividends it receives, comparing it with a price index understated the benchmark. SEBI therefore required mutual funds to benchmark against TRI from 1 February 2018. Always check that a comparison you read uses the TRI.
Typical benchmarks (confirm in the scheme's documents)
| Fund type | Common benchmark |
|---|---|
| Large cap | Nifty 100 TRI (or Nifty 50 TRI) |
| Flexi cap, multi cap | Nifty 500 TRI |
| Mid cap | Nifty Midcap 150 TRI |
| Small cap | Nifty Smallcap 250 TRI |
| Index fund | The index it replicates |
How to compare properly
- Same period, same plan type. Compare direct plan with direct plan, 5-year with 5-year.
- Use rolling returns. A single start date can flatter or punish a fund. Rolling returns show how often the fund beat the benchmark across many start dates. The rolling returns tool does this on real NAV data.
- Look at alpha, not the headline. Alpha is the fund's return minus the benchmark's, after costs. A fund that beats its benchmark by 0.5% in only one year is not skilled.
- Check the benchmark itself. A small-cap fund measured against a large-cap index is misleading. The benchmark should match the category.
- Consider consistency. How a fund behaves in falling markets matters as much as in rising ones.
Index funds and benchmarks
An index fund tries to match its benchmark. The gap between the two, called tracking error, tells you how well it does that job.
Questions people ask
What is a benchmark in a mutual fund?
The index used to measure a fund's performance.
What is TRI?
Total Return Index, which includes reinvested dividends.
What is alpha?
The return a fund earns above its benchmark.
Can a fund beat its benchmark every year?
Rarely. Most active funds beat and trail their benchmark in different years.
Keep going
Run the numbers
Rolling returns
Also useful: Scheme insights, CAGR calculator
How we can help
Sources
- SEBI circular dated 4 January 2018 on total return index benchmarks (effective 1 February 2018)
- AMFI/SEBI benchmark lists
- scheme information documents.
Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. This page is general education, not personal advice. Back to the full glossary