12.1 Benchmarks and Performance

NISM-Series-V-A: Mutual Fund Distributors Certification Examination Exam

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1 Chapter 1: Introduction & Exam Overview

1.1 About the NISM-Series-V-A Examination 1.2 The 12-Unit Curriculum Map and a Study Plan

2 Chapter 2: Investment Landscape

2.1 Investors and Their Financial Goals 2.2 Savings or Investments? 2.3 Different Asset Classes 2.4 Investment Risks 2.5 Risk Measures and Management Strategies 2.6 Behavioural Biases in Investment Decision Making 2.7 Risk Profiling 2.8 Asset Allocation and Do-It-Yourself versus Professional Help

3 Chapter 3: Concept and Role of a Mutual Fund

3.1 Concept of a Mutual Fund 3.2 Classification of Mutual Funds 3.3 Growth of the Mutual Fund Industry in India

4 Chapter 4: Legal Structure of Mutual Funds in India

4.1 Structure of Mutual Funds in India 4.2 Key Constituents of a Mutual Fund 4.3 AMC Organisation Structure and Service Providers 4.4 Role and Function of AMFI

5 Chapter 5: Legal and Regulatory Framework

5.1 Role of Regulators in India 5.2 Role of SEBI and the Mutual Fund Regulations 5.3 Due Diligence Process by AMCs for Distributors 5.4 Investor Grievance Redress Mechanism 5.5 AMFI Code of Conduct for Intermediaries

6 Chapter 6: Scheme Related Information

6.1 Mandatory Documents I: Scheme Information Document and Statement of Additional Information 6.2 Mandatory Documents II: Key Information Memorandum and the Advertisement Code 6.3 Non-Mandatory Disclosures

7 Chapter 7: Fund Distribution and Channel Management Practices

7.1 The Role and Importance of Mutual Fund Distributors 7.2 Different Kinds of Mutual Fund Distributors 7.3 Modes of Distribution 7.4 Pre-requisites to Become a Distributor of a Mutual Fund 7.5 Revenue for a Mutual Fund Distributor 7.6 Commission Disclosure Mandated by SEBI 7.7 Distributors versus Investment Advisers, Nomination Facilities and Change of Distributor

8 Chapter 8: Net Asset Value, Total Expense Ratio and Pricing of Units

8.1 Fair Valuation Principles 8.2 Computation of Net Assets of a Scheme and NAV 8.3 Dividends and Distributable Reserves 8.4 Entry and Exit Load and Its Impact on NAV 8.5 The Expense Ratio Framework: Base Expense Ratio, Brokerage and Statutory Levies 8.6 Key Accounting and Reporting Requirements 8.7 NAV, Total Expense Ratio and Pricing of Units for the Segregated Portfolio

9 Chapter 9: Taxation

9.1 Applicability of Taxes in Respect of Mutual Funds 9.2 Capital Gains on Mutual Fund Units 9.3 Dividend (IDCW) Income and Tax Deducted at Source 9.4 Stamp Duty and Securities Transaction Tax on Mutual Fund Units 9.5 Setting Off Capital Gains and Losses under the Income Tax Act 9.6 Tax Benefit under Section 80C and Applicability of GST

10 Chapter 10: Investor Services

10.1 The New Fund Offer Process 10.2 New Fund Offer Price and Ongoing Offer Price for Subscription 10.3 Investment Plans and Services 10.4 Allotment of Units and Account Statements 10.5 Mutual Fund Investors: Who Can Invest 10.6 Filling the Application Form for Mutual Funds 10.7 Financial Transactions with Mutual Funds 10.8 Cut-Off Time and Time Stamping 10.9 KYC Requirements for Mutual Fund Investors 10.10 Systematic Transactions and Their Operational Aspects 10.11 Non-Financial Transactions, Special Investor Categories and Turnaround Times

11 Chapter 11: Risk, Return and Performance of Funds

11.1 General and Specific Risk Factors 11.2 Factors That Affect Mutual Fund Performance 11.3 Drivers of Returns and Risk in a Scheme 11.4 Measures of Returns 11.5 SEBI Norms Regarding Representation of Returns 11.6 Risks in Fund Investing: The Investor's Perspective 11.7 Measures of Risk and Provisions Relating to Credit Risk

12 Chapter 12: Mutual Fund Scheme Performance

12.1 Benchmarks and Performance 12.2 Price Return Index or Total Return Index 12.3 Basis of Choosing an Appropriate Performance Benchmark 12.4 Benchmarks for Equity Schemes 12.5 Benchmarks for Debt Schemes and Other Schemes 12.6 Quantitative Measures of Fund Manager Performance 12.7 Tracking Error and Scheme Performance Disclosure

13 Chapter 13: Mutual Fund Scheme Selection

13.1 Scheme Selection Based on Investor Needs, Preference and Risk Profile 13.2 Risk Levels in Mutual Fund Schemes 13.3 Scheme Selection Based on Investment Strategy 13.4 Selecting a Scheme Across AMCs or Within a Scheme Category 13.5 Selecting Options in Mutual Fund Schemes and Do's and Don'ts

12.1 Benchmarks and Performance

Key Takeaways Explain This Topic AI

A benchmark is the passive alternative against which a scheme's performance is judged.

SEBI requires a two-tier benchmark structure, with Tier 1 mandatory and Tier 2 optional.

Tier 1 is a broad market index reflecting the scheme's category.

Tier 2, where used, reflects the AMC's particular investment style within that category.

Absolute return without benchmark comparison says nothing about how well a scheme was managed.

Last updated: August 2026

What a Benchmark Is For

A benchmark is the index representing the passive alternative available to an investor in the same segment of the market. It answers the only question that makes a return figure meaningful:

Did the investor do better by paying for this scheme than by simply owning the market it invests in?

A scheme that returned 19% has performed well against a benchmark that returned 14% and poorly against one that returned 26%. The absolute number alone carries almost no information , which is why SEBI requires benchmark returns to be presented alongside scheme returns for identical periods.

The Two-Tier Benchmark Structure

SEBI introduced a two-tier framework with effect from December 2021 .

Tier Status Purpose
Tier 1 Mandatory A broad market index reflecting the scheme's category
Tier 2 Optional An index reflecting the AMC's specific investment style or strategy within that category

Tier 1 is prescribed at category level, and AMFI publishes the list, so every scheme in a category is measured against the same broad index. This is what makes cross-AMC comparison possible: two large cap schemes from different fund houses are judged against the same yardstick rather than against benchmarks each chose for itself.

Tier 2 exists because a broad category index cannot capture every legitimate strategy. A large cap scheme run with a pronounced quality tilt may adopt a quality index at Tier 2, so its investors can see performance against both the broad market and the specific approach the manager follows.

For sectoral and thematic schemes, the Tier 1 benchmark reflects the sector or theme, and the two-tier structure applies in the manner SEBI prescribes for those categories.

For index funds and ETFs , the benchmark is simply the index being tracked, and the relevant measure of success is not outperformance but tracking error , covered in section 12.7.

Why a Prescribed Benchmark Matters

Before benchmarks were standardised at category level, an AMC could select an index against which its scheme happened to look strong. A large cap scheme benchmarked against a broad-market index including mid caps would appear to outperform in a period when large caps led, purely from the composition mismatch.

Prescribing Tier 1 at category level removed that discretion. The benchmark now describes the category, not the scheme's preference.

Reading Performance Against a Benchmark

Observation Reasonable interpretation
Consistently above benchmark across periods Evidence of skill, worth examining further
Above in some periods, below in others Normal; assess over a full cycle
Consistently below benchmark The passive alternative was better; a real finding
Far above in one short period only Possibly a single position or a style tailwind
Above benchmark but below category peers The category did better than the broad index

Two cautions apply throughout.

Compare over a full cycle. A value-oriented manager lags during a growth-led rally by construction, not by error. Three years is a minimum for a meaningful judgement, and five is better.

Compare net of expenses. Scheme returns are computed from NAV and are therefore already net of the expense ratio. The benchmark carries no expenses at all. A scheme matching its benchmark has in fact earned back its entire expense ratio through active management — a better outcome than the raw comparison suggests.

Benchmark Comparison Is Mandatory Disclosure
Benchmark returns must appear alongside scheme returns for the same prescribed periods
Benchmark returns must be computed on a Total Return Index basis
The benchmark and the reason for its selection are disclosed in the Scheme Information Document
A change of benchmark must be disclosed and explained

A change of benchmark deserves particular attention when reviewing a scheme. There are legitimate reasons — a category redefinition, a better-constructed index becoming available. There is also an illegitimate one, which is switching to an index the scheme has been beating. The disclosure requirement makes the change visible; reading it is the analyst's job.

What a Distributor Should Do
Never quote a scheme return without its benchmark return for the same period
Use the Tier 1 benchmark , since it is the standardised category yardstick
Where the fact sheet shows a Tier 2 benchmark, read both — the gap between them describes the manager's style
Check whether the benchmark has changed , and why

Explain to investors that a scheme merely matching its benchmark has covered its costs through active management