Benchmarks & Alpha
What is a Benchmark?
A benchmark is an index that represents the market the fund invests in:
| Fund Type | Common Benchmark |
|---|---|
| Large Cap | Nifty 50, Sensex |
| Mid Cap | Nifty Midcap 150 |
| Small Cap | Nifty Smallcap 250 |
| Flexi Cap | Nifty 500 |
| Debt | CRISIL Composite Bond |
If a large-cap fund returned 12% but Nifty 50 returned 14%, the fund actually underperformed. You would have been better off with a Nifty 50 index fund.
What is Alpha?
Alpha = Fund Return - Benchmark Return
- Positive alpha: Fund beat its benchmark (fund manager added value)
- Zero alpha: Fund matched its benchmark
- Negative alpha: Fund underperformed (you're paying fees for worse returns)
The Harsh Reality
Over 5+ year periods, 80-85% of active fund managers fail to beat their benchmark after accounting for expenses. This is why index funds have become so popular.
When Active Makes Sense
Active management tends to add more value in:
- Mid & Small caps — less analyst coverage, more mispricing to exploit
- Credit risk debt — skilled managers can identify good credits
- Large caps — heavily analyzed, hard to beat Nifty 50
- Liquid/overnight funds — very little room for alpha
The Bottom Line
Always compare a fund's returns to its benchmark. A "good" return that trails the benchmark means you're paying the fund manager to do worse than a simple index fund.