What is a Benchmark? Learn How To Measure a Mutual Fund's Performance

As per SEBI, every mutual fund scheme must disclose a benchmark against which its performance can be compared. A benchmark is a “reference index” that represents the market segment in which a scheme invests. 

Investors can compare the fund’s returns with those of its benchmark to assess whether the scheme has “outperformed” or “underperformed” the market index over a given period.

Many investors evaluate a mutual fund by its historical returns but overlook the “benchmark” against which those returns should be assessed. A lack of comparison may cause investors to remain invested in an underperforming scheme.

Want to avoid this? Read this article to learn what a mutual fund benchmark is and its two major types. Lastly, learn how to assess a scheme’s performance through benchmark comparisons, excess returns, and performance trends.

A benchmark is a standard against which the performance of a mutual fund scheme is compared. Investors can even think of it as a “reference point”. Generally, the benchmark is selected based on the investment objective and asset allocation of the scheme. 

For example:

• A large cap equity fund may use Nifty 50 TRI.
• A mid cap fund may use Nifty Midcap 150 TRI.
• A small cap fund may use Nifty Smallcap 250 TRI.
• A diversified equity fund may use Nifty 500 TRI, and more.

Therefore, the benchmark gives an investor a reference for judging how the scheme has performed relative to the market segment it represents. SEBI requires mutual fund schemes to disclose a benchmark for performance comparison. 

The benchmark should also correspond to the scheme's investment objective and asset allocation. (Source: SEBI Master Circular, dated March 20, 2026, Chapter 3)

A benchmark in mutual funds can be of two broad types: A Price Return Index (PRI) and a Total Return Index (TRI). Now, understand that an index can generate potential returns in two ways:

1. Through changes in the prices of its securities

and

2. Dividends or other distributions received from those securities

If we talk about the difference, a PRI considers only the change in security prices. In contrast, a TRI considers both the change in prices and the dividends received from the securities in the index. For example, 

• Suppose the companies in an index appreciate in value and also pay dividends.
• Now, a TRI includes both these components (appreciation + dividends)  in its return. 
• Whereas a PRI only considers the price appreciation (and ignores dividend or other gains).

For more clarity, let’s understand the difference between PRI vs TRI in detail:

To assess how a scheme has performed, several investors compare its return with the “benchmark return”. But what’s the “right way? Realise that only looking at whether the fund has earned a higher return may not be enough! 

The comparison should cover the “same period” and the “same return” measure, followed by a review of performance across multiple periods. Confused? For your reference, below are some ways to compare a mutual fund’s performance with its benchmark and assess its performance:

1. Compare “Like” With “Like”

You may compare the fund and its benchmark over the same period. 

• Realise that comparing a fund's 5-year return with a benchmark's 1-year return would provide an incorrect comparison because the periods are different.

Next, understand that for longer periods, returns are generally shown as CAGR (Compound Annual Growth Rate), which represents the “annualised” rate of return over a period. SEBI requires “scheme-versus-benchmark” performance to be disclosed as CAGR for 1, 3, 5, 10 years, and since inception. (Source: SEBI Master Circular, dated March 20, 2026, Chapter 3)

Now, to make an assessment, you may calculate the “excess return” as follows:

• Excess Return = Fund CAGR − Benchmark CAGR

Consequently, there could be three potential scenarios:

2. Look for a “Pattern” (Not a Single Year Winner)

A fund beating its benchmark in one year does not establish that it has delivered better performance over the longer term. Equity markets can move through different phases, and a scheme may perform differently during different market conditions.

For this reason, an investor may look at the fund's performance across 1, 3, 5, and 10 years (rather than relying on a single period). The purpose is to see whether the fund has outperformed or underperformed its benchmark across multiple periods.

For more clarity, consider the following hypothetical example:

You can observe that the fund “underperformed” its benchmark over one year, but its three-, five-, and ten-year CAGRs were higher than the benchmark. Such a multi-period analysis may give a more complete picture than looking only at the 1-year return.

3. Compare the Scheme with “Category Peers”

Comparing a mutual fund with its benchmark shows whether it has outperformed or underperformed its market index. However, this does not show how it has performed against other mutual funds in the same category.

For example, 

• A large cap mutual fund may deliver a 10% return when the Nifty 50 TRI delivers 8%. 
• The fund has outperformed its benchmark by 2 percentage points. 
• However, if most large cap funds have delivered returns of 12% over the same period, the scheme may rank below many of its category peers.

So, how to make a complete analysis? Investors may assess the fund from three different perspectives:

Using all three comparisons may potentially provide a broader view of the fund's performance. 

Note: However, past returns alone do not establish future performance, and benchmark, category peer, and historical performance comparisons do not guarantee future returns. These comparisons should be considered alongside the scheme’s investment objective, risk profile, and market conditions.

So now you know what a benchmark in a mutual fund is and how it can be used to assess a scheme’s performance. To revise, benchmarks are “reference points” against which a mutual fund’s returns are compared. 

Investors can use them to calculate “excess returns” and check whether a scheme has outperformed or underperformed its benchmark over a specific period. For a fair or correct comparison, both returns may cover the same period and use the same return measure, such as CAGR. 

Besides, investors may also review performance across multiple periods (to assess consistency) and compare the scheme with other funds/ peers in its category.

For more information, you can visit www.tatamutualfund.com/deshkarenivesh. The Investor Service Centre of Tata Asset Management Pvt. Ltd. is located at Mulla House, Ground Floor, 51, M.G. Road, Near Flora Fountain, Mumbai – 400 001, Maharashtra. The office hours are Monday to Friday, 9:00 AM to 5:30 PM. For assistance, you can also call (022) 6282 7777 from Monday to Saturday, 9:00 AM to 5:30 PM, or email service@tataamc.com

1. What does it mean when a mutual fund underperforms its benchmark?

Underperformance may happen when a mutual fund scheme delivers a lower return than the benchmark over the same period. For example, 

• Suppose a fund earns 10% while its benchmark earns 12%.
• Now, the fund has underperformed by 2 percentage points. 

2. What is the difference between a mutual fund benchmark and category peers?

A benchmark is a market index used to compare a scheme's performance, while category peers are other mutual funds in the same category. For example, 

• A large cap fund may be compared with the Nifty 50 TRI, which is known as “benchmark comparison”.
• Besides, it can also be compared with other large cap funds, known as “peer comparison”. 

Both comparisons may provide different perspectives on a scheme’s performance.

3. Why is TRI used instead of PRI to compare mutual fund performance?

A Price Return Index (PRI) measures changes in security prices, whereas a Total Return Index (TRI) includes price changes + dividends received from index constituents. 

Since mutual funds may also earn potential dividends from their investments, TRI may be a more appropriate basis for comparing their returns with the benchmark.

An Investor Education and Awareness Initiative by Tata Mutual Fund.

To know more about KYC documentation requirements and procedure for change of address, phone number, bank details, etc., please visit: https://www.tatamutualfund.com/deshkarenivesh

Please deal only with registered Mutual Funds, details of which can be verified on the SEBI website under ‘Intermediaries / Market infrastructure institutions.’

All complaints regarding Tata Mutual Fund may be directed to service@tataamc.com and/or https://scores.sebi.gov.in/ (SEBI SCORES portal) and/or https://smartodr.in/login 

Nomination is advisable for all folios opened by an individual, especially with sole holding, as it facilitates an easy transmission process.

This communication is a part of the investor education and awareness initiative of Tata Mutual Fund.