Mutual Fund Scheme Performance for NISM certification
A fund's return means little on its own. This chapter is about judging performance: against the right benchmark, against peers, after adjusting for risk, and using the disclosures SEBI requires.
Mutual FundsSeries V-A60 MCQs4 lessons13 flashcards4 memory tricks
Practise Mutual Fund Scheme Performance free
What you'll learn
- Benchmarks: the yardstick
Choose a suitable benchmark for a scheme and explain two-tier benchmarking. - Comparing with peers
Use category averages, quartiles and rolling returns to compare funds fairly. - Passive funds: tracking error and tracking difference
Measure how well an index fund or ETF follows its index. - Performance disclosures and the fund manager
Read a performance table in SEBI's format and evaluate a fund manager.
Key formulas
| Upside capture | Fund return in up months ÷ benchmark return in up months × 100 |
|---|---|
| Downside capture | Fund return in down months ÷ benchmark return in down months × 100 |
Concepts explained
Benchmarks and TRI
A benchmark is the index a scheme is measured against; SEBI requires it to be a Total Return Index and uses a category-level tier-1 benchmark.
What it means
- Should match the scheme's universe and style.
- TRI includes dividends; PRI doesn't.
- Additional benchmark gives a broad reference.
- Fund 13%; Nifty 500 PRI 11.5%; Nifty 500 TRI 12.8%
- Against PRI: +1.5%
- Against TRI: +0.2%
Answer: Real outperformance is 0.2%
Tracking error and tracking difference
Tracking difference is how much an index fund's return differs from its index; tracking error is how variable that difference is.
What it means
- Main cause of tracking difference: expenses.
- Causes of tracking error: cash flows, rebalancing, timing.
- Both should be low.
- Index TRI 10.5%
- Fund 10.2%
Answer: −0.3%
Information ratio
Information ratio = (fund return − benchmark return) ÷ tracking error: how consistently an active fund beats its benchmark.
What it means
- Higher is better.
- Uses the benchmark, not the risk-free rate.
- Fund 15%, benchmark 13%
- Tracking error 5%
- 2 ÷ 5
Answer: 0.4
Up and down capture ratios
Capture ratios show how much of the benchmark's rises (upside) and falls (downside) a fund captured.
What it means
- Upside > 100: rose more than the benchmark in up periods.
- Downside < 100: fell less than the benchmark in down periods.
- Ideal: high upside, low downside.
Memory tricks
TRI includes dividends reinvested; price index doesn't.
Tracking difference: average gap from the index; tracking error: variability of the gap.
Quartile 1 = top 25% of the category.
Aim for high upside capture and low downside capture.
Try 3 NISM-style questions
Q1. Which measure would you use to compare two Nifty 50 ETFs?
- Alpha against the Nifty Smallcap 250 index
- Exit load only, since the returns of the two will always be identical
- Tracking difference, tracking error, expense ratio and trading liquidity
- Number of distributors
Show answer
Answer: (3) Tracking difference, tracking error, expense ratio and trading liquidity
Passive funds are judged on tracking and cost; ETFs also on liquidity.
Q2. A distributor shows a client a fund's returns against the Nifty 50 price index instead of its stated TRI benchmark. This is
- Misleading and against disclosure norms
- Required by SEBI for equity funds
- Better for the investor's understanding
- Irrelevant
Show answer
Answer: (1) Misleading and against disclosure norms
Using the wrong index flatters the fund.
Q3. In a periodic review, a single year of underperformance by an otherwise consistent fund should usually lead to
- Immediate redemption
- Doubling the investment without review
- Changing the investor's goal
- Monitoring, not an automatic switch
Show answer
Answer: (4) Monitoring, not an automatic switch
Switching has costs; one year isn't conclusive.
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