NISM Series V-D · Chapter 11: Mutual Fund Scheme Performance

L1 · Foundation

Foundation — Benchmarks, TRI, and which index belongs to which scheme

What makes a benchmark credible, why mutual funds moved from the Price Return Index to the Total Return Index in 2018, how the benchmark is chosen for equity, debt, hybrid, gold, real estate and international schemes, the standard benchmarks SEBI requires, and the two-tier structure introduced in 2021.

14 min read · Worth 3% of the paper · Written from pages 274–288 of the official NISM workbook · Updated 18 September 2026

11.1 What a benchmark is for

"Mutual fund schemes invest in the market for the benefit of Unit-holders. How well did a scheme perform? An approach to assess the performance is to PRE-DEFINE A COMPARABLE — A BENCHMARK — against which the scheme can be compared."

Note the word pre-define. A benchmark chosen after the results are in is not a benchmark; it is an excuse.

What makes a benchmark credible

"A credible benchmark should meet the following requirements: It should be IN SYNC WITH (a) the INVESTMENT OBJECTIVE of the scheme (i.e., the securities or variables that go into the calculation of the benchmark should be representative of the kind of portfolio implicit in the scheme's investment objective); (b) ASSET ALLOCATION PATTERN; and (c) INVESTMENT STRATEGY of the scheme."

"The benchmark should be calculated by an INDEPENDENT AGENCY in a TRANSPARENT manner, and PUBLISHED REGULARLY. Most benchmarks are constructed by STOCK EXCHANGES, CREDIT RATING AGENCIES, SECURITIES RESEARCH HOUSES or FINANCIAL PUBLICATIONS."

Who chooses it

"Choice of benchmark is SIMPLEST FOR AN INDEX FUND. The investment objective is clear on the index that the scheme would track. That index would then be the benchmark."

"For other schemes, choice of benchmark is SUBJECTIVE. The benchmark for a scheme is DECIDED BY THE AMC IN CONSULTATION WITH THE TRUSTEES. The SCHEME INFORMATION DOCUMENT HAS TO MENTION THE BENCHMARK. Further, along with the past performance of the scheme, the PERFORMANCE OF THE BENCHMARK DURING THE SAME PERIOD has to be mentioned."

Changing it

"At a later date, the fund may choose to CHANGE the benchmark. This could be because "the investment objective of the scheme may change, or the construction of the index may change, or a better index may become available in the market. AMCs can change the benchmark IN CONSULTATION WITH THE TRUSTEES. Further, the change needs to be JUSTIFIED AND DOCUMENTED. Mutual fund schemes are required to disclose the name(s) of benchmark index/indices with which the scheme performance is compared."

11.2 Price Return Index versus Total Return Index

"Earlier, the Mutual Fund schemes were benchmarked to the Price Return variant of an Index (PRI). PRI ONLY CAPTURES CAPITAL GAINS of the index constituents. WITH EFFECT FROM FEBRUARY 1, 2018, the mutual fund schemes are benchmarked to the TOTAL RETURN variant of an Index (TRI). The Total Return variant of an index takes into account ALL DIVIDENDS/INTEREST PAYMENTS that are generated from the basket of constituents that make up the index IN ADDITION TO THE CAPITAL GAINS."

Why the change was necessary: "The scheme performance would be calculated AFTER ADDING THE DIVIDENDS that the scheme has earned from the investments. Even in case of IDCW option, the scheme performance is calculated using the REINVESTMENT of IDCW option method. In such a case, if the scheme performance is compared with that of PRI, IT WOULD GIVE A SLIGHT ADVANTAGE TO THE SCHEME."

In other words, the scheme's own return already counted its dividends; the PRI did not count the index's. The comparison was structurally tilted in the scheme's favour.

The consequence, stated honestly: "this would make it appear that FEWER SCHEMES ARE ABLE TO BEAT THEIR BENCHMARK INDICES. WHILE THE REALITY HAS NOT CHANGED, THE PRESENTATION OF THE SAME HAS CHANGED."

And the size of the gap: "The gap between the returns between PRI and TRI is THE AMOUNT OF DIVIDEND. Historically, in the Indian markets, the DIVIDEND YIELDS AT THE INDEX LEVELS HAVE RANGED FROM 1.5 PERCENT TO 2.5 PERCENT, most of the times."

11.3 Choosing the benchmark — SEBI's mandate

"With an objective to enable the investors to COMPARE the performance of a scheme vis-à-vis an APPROPRIATE benchmark, SEBI has mandated:

"Selection of a benchmark... to be IN ALIGNMENT WITH the INVESTMENT OBJECTIVE, ASSET ALLOCATION PATTERN and INVESTMENT STRATEGY of the scheme."
"The performance of the schemes... to be benchmarked to the TOTAL RETURN VARIANT of the Index chosen."
"Mutual funds should use a COMPOSITE CAGR figure of the performance of the PRI benchmark (UNTIL THE DATE FROM WHICH TRI IS AVAILABLE) and the TRI (SUBSEQUENTLY) to compare the performance of their scheme in case TRI is NOT AVAILABLE for that particular period."

"Thus, the scheme's benchmark must be chosen based on Scheme's INVESTMENT OBJECTIVE, INVESTMENT STRATEGY of the scheme, and the scheme's ASSET ALLOCATION PATTERN. ALL THE THREE CAN BE SEEN IN THE SCHEME INFORMATION DOCUMENT."

Notice what is not on that list: past returns. A benchmark is chosen from the scheme's design, never from its record.

11.4 Benchmarks for equity schemes

"The following aspects of the investment objective — SCHEME TYPE, CHOICE OF INVESTMENT UNIVERSE, PORTFOLIO CONCENTRATION, UNDERLYING EXPOSURE — drive the choice of benchmark in equity schemes."

Scheme type. "A sector fund would invest in only the concerned sector; while there are some funds that invest in all sectors. Therefore, funds investing in different sectors need to have a DIVERSIFIED index as a benchmark, like S&P BSE Sensex or Nifty 50 or S&P BSE 200 or S&P BSE 500 or Nifty 100 or Nifty 500; sectoral/thematic funds select SECTORAL/THEMATIC indices such as S&P BSE Bankex, S&P BSE FMCG Index, Nifty Infrastructure Index and Nifty Energy Index."

Choice of investment universe. "S&P BSE Sensex and Nifty 50 indices are calculated based on 30 (in the case of Sensex) / 50 (in the case of Nifty) LARGE companies. Thus, these indices are appropriate benchmarks for those equity funds that invest in LARGE companies. For MIDCAP funds midcap indices such as Nifty Midcap 50 or S&P BSE Midcap are considered as better benchmarks."

Choice of portfolio concentration. "Some equity funds... prefer to have FEWER STOCKS in their portfolio. For such schemes, appropriate benchmarks are NARROW indices such as S&P BSE Sensex and Nifty 50, which have fewer stocks. Schemes that propose to invest in more number of companies will prefer BROADER indices like S&P BSE 100/Nifty 100 (based on 100 stocks), S&P BSE 200/Nifty 200 (based on 200 stocks) and S&P BSE 500/Nifty 500 (based on 500 stocks)."

11.5 Benchmarks for debt schemes

"As per the SEBI guidelines, the benchmark for debt (and balanced schemes) SHOULD BE DEVELOPED BY RESEARCH AND RATING AGENCIES RECOMMENDED BY AMFI. CRISIL, ICICI SECURITIES AND NSE have developed various such indices."

"NSE has indices for the Government Securities Market... such as Nifty composite G-sec index, Nifty 4-8 Year G-sec index, Nifty 10-year benchmark G-sec index. BSE also has certain indices... such as the S&P BSE India Sovereign Bond Index, S&P BSE India Government Bill Index."

The I-Bex family, which is a favourite of examiners: "ICICI Securities' Sovereign Bond Index (I-Bex) is based on GOVERNMENT SECURITIES. It consists of an UMBRELLA INDEX covering the entire market, and SUB-INDICES catering to THREE CONTIGUOUS MATURITY BUCKETS."

Sub-index	Maturity bucket
Si-Bex	1 to 3 years
Mi-Bex	3 to 7 years
Li-Bex	more than 7 years

Scheme type. "Liquid schemes invest in securities of UP TO 91 DAYS' MATURITY. Therefore, a short-term money market benchmark such as NSE's Liquid or CRISIL Liquid Fund Index is suitable."

Choice of investment universe. "Gilt funds invest ONLY in Government securities. Therefore, indices based on Government Securities are appropriate. Debt funds that invest in a WIDE RANGE of Government and Non-Government securities need to choose benchmarks that are calculated based on a DIVERSE MIX of debt securities."

11.6 Benchmarks for other schemes

Hybrid funds. "the benchmark for a hybrid fund is a BLEND of an equity and debt index. For instance, a hybrid scheme with asset allocation of about 65 percent in equity and balance in debt can use a SYNTHETIC INDEX that is calculated as 65 percent of S&P BSE Sensex and 35 percent of I-Bex."

Gold ETF. "GOLD PRICE would be the benchmark for such funds."

Real estate funds. "A few real estate services companies have developed real estate indices. These have SHORTER HISTORIES, and are YET TO EARN THE WIDER ACCEPTANCE that the equity indices enjoy."

International funds. "The benchmark would depend on WHERE the scheme proposes to invest. Thus, a scheme seeking to invest in China might have the SHANGHAI COMPOSITE INDEX... S&P 500 may be appropriate for a scheme that would invest largely in the US market. A scheme that seeks to invest across a number of countries, can structure a SYNTHETIC INDEX that would be a blend of the relevant indices."

Standard benchmarks

"For the sake of STANDARDIZATION, schemes need to disclose return IN INR and BY WAY OF CAGR for the following benchmarks APART FROM the scheme benchmarks:"

Scheme Type	Standard Benchmark
Equity scheme	Sensex or Nifty
All debt schemes having duration/maturity up to 1 year, and arbitrage funds	1 year T-Bill
All debt schemes not covered above	10 years dated GoI security
Conservative Hybrid Fund	10 years dated GoI security
Balanced Hybrid / Aggressive Hybrid / Dynamic Asset Allocation or Balanced Advantage / Multi Asset Allocation	Sensex / Nifty
Equity Savings	10 years dated GoI security
Retirement Fund / Children's Fund	Sensex / Nifty
Index Funds / ETFs & FoFs (Overseas/Domestic)	Appropriate benchmark based on the underlying asset allocation as per above

"This was proposed in order to bring standardization to the process of benchmarking as well as comparing the scheme performance with EASILY AVAILABLE indices. These disclosures shall form part of the STATEMENT OF ADDITIONAL INFORMATION and ALL ADVERTISEMENTS of Mutual Funds."

The two-tier structure

"To standardize and bring-in uniformity in the benchmarks of mutual fund schemes, vide SEBI circular dated OCTOBER 27, 2021, it has been notified that there will be a TWO-TIERED STRUCTURE for benchmarking of certain category of schemes. The FIRST-TIER benchmark will be REFLECTIVE OF THE CATEGORY of the scheme, and the SECOND-TIER benchmark will be DEMONSTRATIVE OF THE INVESTMENT STYLE/STRATEGY OF THE FUND MANAGER within the category. ALL THE BENCHMARKS FOLLOWED WILL NECESSARILY BE TOTAL RETURN INDICES."

Type of Scheme	Tier-1	Tier-2
Income / Debt Oriented Schemes	"One BROAD MARKET INDEX per index provider for each category" e.g. NIFTY Ultra Short Duration Debt Index or CRISIL Ultra Short Term Debt Index for the Ultra Short Duration Fund category	"Bespoke according to Investment Style/Strategy", e.g. an AAA Bond Index
Growth / Equity Oriented Schemes	"One broad market index per index provider for each category", e.g. S&P BSE 100 Index or NSE 100 Index for the Large Cap Fund category	"Bespoke according to Investment Style/Strategy", e.g. Nifty 50 Index
Hybrid and Solution Oriented Schemes	"A SINGLE benchmark, i.e., Broad Market Benchmark wherever available or bespoke to be created for schemes, which would then be applicable ACROSS INDUSTRY"	—
Thematic / Sectoral schemes	"A SINGLE benchmark as characteristics of the schemes are already tapered according to the theme/sector"	—
Index Funds and ETFs	"A SINGLE benchmark as these schemes replicate an underlying index"	—
Fund of Funds (FoFs)	"If a FoF scheme is investing in a SINGLE fund, then benchmark of the UNDERLYING scheme will be used. However, in case a FoF scheme invests in MULTIPLE schemes, then BROAD MARKET INDEX will be applied"	—

The circular "shall come into force with effect from January 1, 2022", and the first tier benchmarks for open-ended debt schemes follow the Potential Risk Class, implemented with effect from April 1, 2022.

Think of it like this

The measuring tape must be chosen before the cloth is cut

A benchmark exists to answer one question honestly: "How well did a scheme perform?" The workbook's answer is to "PRE-DEFINE a comparable — a benchmark — against which the scheme can be compared." That word pre-define is doing the work. If a fund could pick its yardstick after seeing its own results, every fund would be a top performer. This is exactly why Sample Question 2 exists: past returns are not a valid basis for choosing a benchmark. The three valid bases — objective, strategy, asset allocation — are all things written down in the SID before a single rupee is invested.

PRI counted your dividends but not the index's

Until February 2018 the comparison was quietly rigged. The scheme's return included the dividends it received, because "even in case of IDCW option, the scheme performance is calculated using the Reinvestment of IDCW option method". But the PRI only captures capital gains of the index constituents — so the index was scored without its dividends. "if the scheme performance is compared with that of PRI, it would give a SLIGHT ADVANTAGE to the scheme." Like a race where one runner's time is measured from the starting gun and the other's from a second later. The move to TRI simply started both stopwatches together — hence the candid admission that "fewer schemes are able to beat their benchmark indices. WHILE THE REALITY HAS NOT CHANGED, the PRESENTATION of the same has changed."

The size of the missing dividend

How big was the tilt? "The gap between the returns between PRI and TRI is THE AMOUNT OF DIVIDEND. Historically, in the Indian markets, the dividend yields at the INDEX LEVELS have ranged from 1.5 PERCENT TO 2.5 PERCENT, most of the times." That is not a rounding error — over ten years, two per cent a year compounds into a very large difference. It explains why a fund that "beat the Nifty by 1.5 per cent" before 2018 may have been doing nothing at all once the index's own dividends were counted. Whenever you see a long-run outperformance figure of one or two per cent, ask which variant of the index it was measured against.

Si, Mi, Li — short, medium, long

The I-Bex family is the most memorisable set of names in this chapter, because the prefixes say what they mean. ICICI Securities' Sovereign Bond Index (I-Bex) is "an UMBRELLA INDEX covering the entire market, and sub-indices catering to three contiguous maturity buckets": Si-Bex (1 to 3 years) — Short; Mi-Bex (3 to 7 years) — Medium; Li-Bex (more than 7 years) — Long. All three are built on government securities, which is why a hybrid fund can pair 65 per cent Sensex with 35 per cent I-Bex and get a clean debt leg with no credit risk in it.

A narrow fund needs a narrow yardstick

Benchmarking a 25-stock concentrated fund against the Nifty 500 flatters or punishes it for reasons that have nothing to do with the manager. Hence: for schemes that "prefer to have fewer stocks in their portfolio... appropriate benchmarks are NARROW indices such as S&P BSE Sensex and Nifty 50", while schemes investing in "more number of companies will prefer broader indices" — 100, 200 or 500 stocks. The same logic runs through the other two drivers: a sector fund gets a sectoral index, and a midcap fund gets Nifty Midcap 50 or S&P BSE Midcap, not the Sensex. Match the shape of the yardstick to the shape of the portfolio.

Two tiers: what you are, and how you do it

The 2021 structure separates two different questions. Tier-1 is "reflective of the CATEGORY of the scheme" — it asks what kind of fund is this? A large-cap fund is measured against a broad large-cap index like the S&P BSE 100. Tier-2 is "demonstrative of the INVESTMENT STYLE/STRATEGY of the Fund Manager WITHIN the category" — it asks how does this particular manager run the money? An AAA-only debt manager gets an AAA Bond Index alongside his category index. It is like judging a restaurant first against all South Indian restaurants, and then against the ones that serve only Chettinad food. And all of them, both tiers, are Total Return Indices.

The standard benchmark is the common ruler

Beyond its own benchmark, every scheme must also report against a standard one — "in INR and by way of CAGR". Equity schemes report against Sensex or Nifty; debt schemes of up to one year and arbitrage funds against the 1 year T-Bill; longer debt, Conservative Hybrid and Equity Savings against the 10 years dated GoI security; and Retirement and Children's Funds against Sensex/Nifty. The purpose is to let an investor "compare the scheme performance with EASILY AVAILABLE indices" — a common ruler everybody already owns, printed in the SAI and all advertisements, so that no fund can hide behind an index nobody has heard of.

The index fund has the easiest benchmark and the hardest job

"Choice of benchmark is SIMPLEST for an INDEX FUND. The investment objective is CLEAR on the index that the scheme would track." No committee, no judgement, no consultation — the benchmark is written into the product itself. But the easy choice comes with an unforgiving standard: the index fund is not asked to beat anything, only to match it, and its failure is measured as tracking error, which "was expected to be zero." Everywhere else in this chapter the manager is judged on how far he departs from the index; here he is judged on how little he departs from it.

Key terms in this chapter

Alpha: The difference between a scheme's actual return and the optimal return implied by its beta relative to the market. Positive alpha indicates outperformance by the fund manager, negative alpha underperformance — and it should be evaluated only for diversified equity schemes.
Benchmark: A pre-defined comparable against which a scheme's performance is judged. It must be in sync with the scheme's investment objective, asset allocation pattern and investment strategy, calculated by an independent agency in a transparent manner, and published regularly.
Composite CAGR: The figure used where TRI is not available for a period — the PRI benchmark performance up to the date TRI becomes available, and the TRI thereafter, combined into one compounded annual growth rate.
Discreet annual returns: Year-by-year returns, used to assess the consistency of a fund's performance across different market scenarios — as opposed to cumulative returns, which show the total journey over a holding period.
Fund factsheet: The monthly publication carrying a fund's objective, performance, portfolio and basic investment requirements, and the fund manager's views on the economy and markets. It is not mandatory, though most fund houses publish one, and it is subject to SEBI's advertising guidelines.
I-Bex: ICICI Securities' Sovereign Bond Index, built on government securities — an umbrella index covering the whole market with three contiguous maturity sub-indices.
Information Ratio: Excess return over the benchmark divided by the standard deviation of that excess return — a measure of the manager's skill and of the consistency with which the excess return is produced.
Optimal return: The return a non-index scheme should earn given its beta relative to the market. Alpha is measured as the gap between the actual return and this figure.
Price Return Index (PRI): An index variant that captures only the capital gains of its constituents, ignoring the dividends and interest they pay. Mutual fund schemes were benchmarked to it until 1 February 2018.
Product label: The suitability snapshot accompanying product literature, identifying the scheme's objective as wealth creation, regular income generation or liquidity, the asset class used, the suitable holding period, and the Risk-o-meter reading that lets an investor match his risk-taking ability to the scheme.
Relative return comparison: Comparing a scheme against its benchmark or peer group. Its weakness is that it does not distinguish between two schemes that took different levels of risk in pursuit of the same objective, and is unfair to the manager who earned the same return with less risk.
Risk premium: The scheme return less the risk-free return (Rs − Rf) — what the investor earned for taking risk instead of lending to the government. The T-Bill index is a good measure of the risk-free rate.
Sharpe Ratio: The risk premium per unit of total risk — (Rs − Rf) divided by standard deviation. Higher is better, and comparisons may be made only between comparable schemes.
Standard benchmarks: The common indices every scheme must additionally report against, in INR and as CAGR, in the Statement of Additional Information and all advertisements — so that investors can compare against indices they already know.
Synthetic index: A blended benchmark built to match a scheme's asset allocation — for a hybrid fund, a weighted mix of an equity and a debt index; for a multi-country international fund, a blend of the relevant country indices.
Total Return Index (TRI): An index variant that adds all dividends and interest payments generated by the constituents to their capital gains. Mandatory for mutual fund benchmarking from 1 February 2018, and required for every benchmark under the two-tier structure.
Tracking error: The standard deviation of a fund's excess returns over its benchmark. Once used to test how closely an index fund matched its index — where zero was the ideal — it is now used to measure how consistently a fund outperforms.
Treynor Ratio: The risk premium per unit of systematic risk — (Rs − Rf) divided by beta. Higher is better, and because beta belongs to equity, comparisons should be restricted to diversified equity schemes.
Two-tier benchmarking: The structure introduced by SEBI's circular of 27 October 2021, effective 1 January 2022. Tier-1 reflects the scheme's category; Tier-2 reflects the fund manager's investment style or strategy within that category. All benchmarks must be Total Return Indices.

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Original explanatory writing based on the official NISM workbook for Series V-D, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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