NISM Series V-D · Chapter 11
Mutual Fund Scheme Performance
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A return on its own means little: 12% may be excellent for a debt fund and poor for a small-cap fund. This chapter explains how to judge a scheme fairly, against the right benchmark and after allowing for the risk taken, and how to read the performance information funds publish.
1What a benchmark is and who picks it
A benchmark is an index that represents what a scheme invests in. It must match the scheme's objective, asset allocation and strategy, and it must be calculated and published independently. The AMC chooses it in consultation with the trustees and discloses it in the SID; any change must be justified and documented.
Example A large-cap fund that returned 14% looks good, but if its benchmark, the Nifty 50 TRI, returned 16%, it actually underperformed.
Remember
- Benchmark chosen by the AMC with the trustees; changes justified and documented.
2Price Return Index vs Total Return Index
A Price Return Index (PRI) tracks only price changes. A Total Return Index (TRI) also includes dividends, as if they were reinvested. Since February 2018, schemes are benchmarked against TRI, because scheme returns include dividends too. This made comparisons fairer, and fewer schemes appeared to beat their benchmarks. If TRI data is not available for part of the period, a composite is used: PRI until TRI starts, TRI thereafter.
Exam trap TRI does not exclude dividends and is not easier to beat; it is harder, because it is higher than the PRI.
Example In a year the Nifty 50 price index rose 10% and companies paid about 1.5% in dividends. The TRI rose about 11.5%, so a fund that returned 11% beat the PRI but lagged the TRI.
Remember
- TRI includes dividends; used since February 2018.
3Choosing the right benchmark
| Scheme | Suitable benchmark |
|---|---|
| Large cap | Nifty 50, Sensex |
| Broad diversified equity | Nifty 500, BSE 500 |
| Sector fund (e.g. banking) | Sector index such as Nifty Bank or BSE Bankex |
| Liquid fund | Liquid or short-term money market index |
| Gilt fund | Government securities index |
| Hybrid (e.g. 65% equity, 35% debt) | A blended index: 65% equity index + 35% debt index |
| Gold ETF | Price of gold |
| International fund | Index of the target market |
Under SEBI's two-tier framework, the Tier-1 benchmark reflects the category and an optional Tier-2 benchmark reflects the fund manager's style or strategy within the category.
Example A banking sector fund compared with the Nifty 500 would look wrong in years when banks and the broad market move differently. Nifty Bank is the right yardstick.
Remember
- The benchmark must match what the scheme actually holds.
- Tier-1 = category; Tier-2 = style.
4Risk-adjusted performance
Comparing returns alone ignores risk: a manager may have earned more simply by taking more risk. Risk-adjusted measures fix this:
| Measure | Formula | What it tells you |
|---|---|---|
| Sharpe ratio | (Scheme return − risk-free rate) ÷ standard deviation | Extra return per unit of total risk |
| Treynor ratio | (Scheme return − risk-free rate) ÷ beta | Extra return per unit of market risk |
| Alpha | Scheme return − [Rf + beta × (market return − Rf)] | Return above what its market risk would predict; positive is good |
| Information ratio | (Scheme return − benchmark return) ÷ standard deviation of the difference | Consistency of outperformance; the one SEBI requires schemes to disclose |
Example A scheme returned 11% with a standard deviation of 12.5%, and the risk-free rate is 6%. Sharpe = (11 − 6) ÷ 12.5 = 0.40.
Example Risk-free 6%, market 11%, beta 1.1, scheme return 12%. Expected return = 6 + 1.1 × (11 − 6) = 11.5%. Alpha = 12 − 11.5 = 0.5%.
Exam trap Sharpe ratios should be compared only among similar schemes; an equity fund's Sharpe cannot be meaningfully compared with a debt fund's.
Remember
- Sharpe: total risk; Treynor: beta; Alpha: excess over expected.
- Compare like with like.
5Tracking error
Tracking error is the standard deviation of the difference between a scheme's returns and its benchmark's returns. For an index fund it should be close to zero, because the fund is meant to copy the index. For an active fund, a low tracking error means its performance stays close to the benchmark.
Exam trap Tracking error is a standard deviation of excess returns, not the expense ratio or the beta.
Example Two Nifty index funds both returned close to the index. Fund A's daily returns stray little from the index (tracking error 0.05%); Fund B's stray more (0.30%). Fund A is copying the index more closely.
Remember
- Index funds: tracking error should be near zero.
6Reading performance disclosures
The product label tells a distributor whether a scheme suits an investor: its objective, asset class, suggested holding period and risk level (risk-o-meter). Discrete annual returns (year by year) show how consistent the performance has been across different market conditions; a strong 5-year CAGR can hide one exceptional year.
Factsheets also link scheme performance to the economy. For example, a persistently high fiscal deficit means more government borrowing, which tends to push interest rates up; and low interest rates abroad tend to bring foreign money into emerging markets like India.
Example Two funds both have a 5-year CAGR of 12%. Fund A returned 10–14% every year; Fund B returned 40% once and was flat in other years. The discrete annual returns reveal that Fund A was far more consistent.
Remember
- Product label = suitability at a glance.
- Discrete annual returns show consistency.
Original summary written by Integrato Digital to complement the official NISM workbook (July 2026 version). Read the workbook for the full text.