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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Performance

In evaluating a mutual fund scheme's performance, why is it appropriate to compare an equity large-cap scheme with its declared benchmark such as a Total Return Index?

A Total Return Index includes reinvested dividends, just as a scheme's NAV reflects the dividends its holdings earn. This makes the comparison like-for-like. A price-only index ignores dividends and would understate the benchmark's return.

  1. AA Total Return Index excludes dividends so it is simpler
  2. BA Total Return Index includes reinvested dividends, so it is comparable with a scheme's NAV growthCorrect
  3. CA Total Return Index guarantees returns to investors
  4. DA Total Return Index is used only for debt schemes

Explanation

A scheme's NAV reflects dividends received by the portfolio, which are reinvested. A Total Return Index likewise includes dividends, so it gives a like-for-like comparison. A price index would ignore dividends and understate the benchmark.

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