Key takeaways
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Every fund has a benchmark index it should be compared against, not absolute return✓
Alpha = fund return minus benchmark return — this is what you are paying for✓
Compare performance over 5–10 years, not 1 year✓
Rolling returns show consistency — more reliable than point-to-point returns✓
60–70% of large-cap active funds underperform their Nifty 50 benchmark over 10 years📌
The 18% return that was actually a failure
Fund A returned 18% last year.
Fund B (index fund) returned 22% last year.
Fund A charged 1.5% expense ratio. Fund B charged 0.1%.
Fund A's alpha = 18% − 22% = −4% per year.
You paid 1.4% more in fees to get 4% less return. The fund manager destroyed value relative to doing nothing (buying an index fund).
Benchmark by fund category
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Why point-to-point returns lie
Fund X 5-year return: 72%.
Fund Y 5-year return: 68%.
Looks like Fund X wins. But:
• Fund X had a terrible year 1, then an amazing year 5
• Fund Y was consistently 12–14% each year
• If you had invested 3 years ago (not 5), Fund Y beat Fund X
Rolling returns fix this: instead of measuring one 5-year period, measure every possible 5-year period overlapping by 1 month. This reveals whether the fund consistently beats the benchmark — or just got lucky in the specific period being shown.
Where active management is worth paying for
Large-cap: index funds win
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Most information already priced in by thousands of analysts✓
Very hard to find genuine 'edge' on Reliance, HDFC, Infosys✓
60–70% of active large-cap funds underperform Nifty over 10 yrs✓
Index fund at 0.1% TER is almost always the better choiceMid/Small-cap: active can add value
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Fewer analysts cover smaller companies✓
Real information gaps a skilled manager can exploit✓
Good active mid-cap funds have outperformed in India✓
Worth paying 1–1.5% TER if track record is strong (5+ yrs)⚠Educational content only. Numbers shown are illustrative — actual returns vary. This is not investment advice. Consult a SEBI-registered financial advisor before investing.
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