Investor Corner/Building and judging a portfolio/Evaluating Funds
3.3.5 Benchmark Selection
A fund should be judged against an appropriate benchmark, matched to its own market cap segment and investment style. Comparing a mid cap fund's returns to the Nifty 50, a large cap index, is a common and genuinely misleading mistake.
Why the comparison has to be like-for-like
Mid cap and small cap stocks have historically behaved quite differently from large cap stocks, particularly in terms of volatility and the typical timing of their outperformance and underperformance relative to each other. Comparing a mid cap fund's return against a large cap index during a period when large caps happen to be leading makes the mid cap fund look artificially worse than it actually is relative to its true, appropriate peer group.
Getting the comparison right
A mid cap fund should generally be measured against a mid cap index. A value oriented fund should ideally be measured against a value tilted benchmark where one reasonably exists, rather than a broad, style agnostic index. Regulation generally requires funds to disclose their designated benchmark clearly, and that stated benchmark, not an unrelated one, is the fair basis for judging that specific fund's performance.
Why this matters for realistic expectations
Setting the wrong benchmark expectation can lead to either unfairly harsh judgment of a genuinely well-performing fund, or unwarranted confidence in a fund that is simply riding a broader tailwind common to its entire category or segment rather than demonstrating genuine, fund-specific skill.
How PriLytics helps. PriLytics lets you compare any holding against a chosen benchmark such as the Nifty 50 TRI, over any period, so comparisons are made on your own terms with full transparency. Compare against a benchmark.