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

Why is a scheme's return generally compared with its benchmark, such as a Total Return Index, rather than a price-only index?

A Total Return Index is used because it includes dividends reinvested, just as a scheme's NAV reflects income earned by the portfolio. A price-only index ignores dividends, so it would understate the benchmark and give an unfair comparison with the scheme.

  1. AA Total Return Index includes reinvested dividends, so it is comparable with scheme returns that include payoutsCorrect
  2. BA Total Return Index excludes dividends, so it is more conservative
  3. CA price index is not permitted to be used by any scheme
  4. DA Total Return Index excludes all taxes and expenses of the index constituents, which is unrelated to the scheme

Explanation

A scheme's NAV return reflects dividends received by the portfolio, so the fair comparison is with an index that also reflects dividends reinvested. A Total Return Index does this; a price index ignores dividends and understates the benchmark's performance.

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