12.3 Basis of Choosing an Appropriate Performance Benchmark

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

12.3 Basis of Choosing an Appropriate Performance Benchmark

Key Takeaways Explain This Topic AI

A benchmark must match the scheme's mandate in asset class, market capitalisation and strategy.

It must be investable, transparent, rules-based and published independently.

Tier 1 benchmarks are prescribed at category level, removing discretion from the AMC.

A mismatched benchmark manufactures apparent outperformance from composition differences.

Any change of benchmark must be disclosed and explained in the scheme documents.

Last updated: August 2026

The Criteria

A benchmark is fit for purpose when it satisfies several conditions simultaneously.

It must match the mandate

The benchmark must reflect what the scheme is required to invest in:

Scheme mandate Appropriate benchmark
Large cap equity A large cap index such as the Nifty 100 TRI
Mid cap equity A mid cap index such as the Nifty Midcap 150 TRI
Small cap equity A small cap index
Flexi cap or multi cap A broad multi-capitalisation index
Sectoral or thematic The index for that sector or theme
Short duration debt A short duration debt index
Gilt A government securities index
Liquid A liquid or money market index
Hybrid A composite index blending equity and debt in the mandated proportion
Index fund or ETF The index being tracked

A mismatch in any of asset class, market capitalisation, duration, credit quality or geography produces a comparison that measures the mismatch rather than the manager.

It must be investable

An investor must in principle be able to buy the index through a passive vehicle. A benchmark that cannot be replicated is not a genuine alternative, and comparison against it is meaningless.

It must be independently published and rules-based

The index should be constructed and maintained by an independent index provider according to published, objective rules covering constituent selection, weighting and rebalancing. An index whose composition can be adjusted at someone's discretion is not a benchmark; it is an opinion.

It must be transparent

Constituents, weights and methodology must be publicly available so that the comparison can be examined.

It must be consistently applied

The same benchmark, applied across periods, on a total return basis. Changing the benchmark mid-stream and presenting a continuous performance series conceals the change.

How SEBI Removed the Discretion

Under the two-tier framework, Tier 1 benchmarks are prescribed at category level and AMFI publishes the list. An AMC therefore cannot choose a flattering index for its large cap scheme; every large cap scheme is measured against the same one.

Tier 2 remains at the AMC's option and reflects its particular strategy within the category. Because it is chosen rather than prescribed, a Tier 2 benchmark deserves the scrutiny that Tier 1 no longer requires: is it a genuine description of the manager's approach, or an index the scheme happens to beat?

What Goes Wrong with a Mismatched Benchmark

Illustration. A scheme mandated to invest predominantly in mid caps is benchmarked against a large cap index. In a year when mid caps return 26% and large caps 14%, the scheme returns 24%.

Against the large cap index, it appears to have outperformed by 10 percentage points
Against a mid cap index, it in fact lagged by 2 percentage points

The apparent outperformance came entirely from the capitalisation mismatch. No skill was demonstrated, and in fact the scheme trailed its true opportunity set.

This is why benchmark appropriateness is examined as a topic in its own right, and why the standardisation of Tier 1 mattered.

Composite Benchmarks for Hybrid Schemes

A hybrid scheme needs a benchmark blending its mandated proportions — for example an index composed 65% of an equity index and 35% of a debt index for an aggressive hybrid scheme. The blend should reflect the mandated allocation. Where a scheme's actual allocation drifts materially from the blend, the comparison weakens, which is one reason dynamic asset allocation schemes are difficult to benchmark meaningfully.

Changes of Benchmark

A change must be disclosed and explained . Legitimate reasons include:

A change in the scheme's category following a regulatory redefinition
Availability of a better-constructed index for the segment
Alignment with the prescribed Tier 1 benchmark for the category

The illegitimate reason is switching to an index the scheme has been outperforming. Because the change must be disclosed, it can be identified — but only by someone who reads the disclosure. A distributor reviewing a scheme's long-term record should check whether the benchmark against which it is presented has been constant throughout the period shown.

Who Builds the Benchmarks

Indian equity and debt benchmarks are constructed by specialist index providers — principally the index subsidiaries of the two exchanges — which publish a methodology document for every index and operate an index policy committee that applies it. Three construction features matter when judging whether a benchmark is appropriate:

Weighting. Most broad Indian equity indices are weighted by free-float market capitalisation , meaning only shares actually available for trading count, not promoter or locked-in holdings. A scheme that weights positions by conviction will therefore diverge from its benchmark even when it holds identical stocks.

Periodic reconstitution. Constituents are reviewed on a published cycle and changed according to objective eligibility rules. Because the review is scheduled and announced, the benchmark's composition is knowable in advance — the opposite of a discretionary list.

Capping. Sector and thematic indices commonly cap individual constituent weights so that a single dominant stock does not become the index. Where a scheme is prohibited from taking positions the index carries uncapped, tracking will diverge for structural rather than skill-related reasons.

The Benchmark Risk-o-Meter Test

Since the risk-o-meter of the benchmark must be disclosed alongside the scheme's own, appropriateness can be checked without any calculation. If a scheme sits at Very High and its supposed benchmark sits at Moderate, the two are not describing the same opportunity set, whatever the category label says.

A Four-Question Check

Before accepting a performance comparison, ask:

Is the benchmark the prescribed Tier 1 index for the scheme's category?

Is it stated on a Total Return basis?

Has it been the same benchmark throughout the period presented?

Do the risk-o-meter readings of scheme and benchmark sit close to each other?

A comparison that fails any one of these is not evidence about the manager. It is evidence about the comparison.