The Benchmark Switcheroo: Beating an Index With Its Pockets Sewn Shut

For years, Nikhil Rajadhyaksha’s fund factsheet told a proud story: “outperformed the Nifty by 1.2% annually.” Nikhil, 44, a manufacturing supervisor in Nashik, took that number at face value for a decade. What the footnote didn’t advertise: the comparison was against Nifty’s price index — a version of the market that pretends dividends do not exist. Add the roughly 1.2–1.5% a year that Nifty companies actually pay out, and the fund’s supposedly heroic outperformance was… approximately zero, nothing at all. The fund hadn’t beaten the market. It had beaten a version of the market with its pockets sewn shut — and a newer switcheroo, hiding in plain sight on the same factsheet, had quite quietly already replaced the old one.

The machinery: two indexes, one flattering

Every index comes in two flavours. The price index tracks only share prices. The Total Returns Index (TRI) adds dividends reinvested — which is what an investor actually experiences, and what a fund actually collects. A fund holds the stocks, pockets the dividends, and then — for years — compared its dividend-inclusive returns against a dividend-free benchmark. Free outperformance, manufactured by choosing the opponent. SEBI ended the practice in 2018 by mandating TRI benchmarking; the industry had used the flattering yardstick for the two decades prior, and much of its historical reputation was built on it.

Why this still matters after 2018

Because the folklore survives the fix. “Active funds in India have always beaten the index” is a belief formed in the price-index era, repeated today by sellers who never mention the switch. And the switcheroo instinct lives on in subtler forms: funds benchmarked against indices easier than their real hunting ground, or performance charts starting conveniently after a bad year. The yardstick is always a choice, and someone chose it before showing you.

What nobody tells you: the benchmark itself can change mid-flight

SEBI’s 2021 categorisation and rationalisation rules require every scheme to declare a single “Tier 1” benchmark suited to its category, and a change of benchmark counts as a fundamental attribute change requiring unitholder notice under SEBI’s mutual fund regulations. In practice this still happens more quietly than the rule intends: a fund that has underperformed its original, harder benchmark for several years switches to a Tier 1 index that better matches its actual portfolio composition, and the factsheet resets its “since benchmark change” outperformance clock without ever explaining why the old comparison disappeared. The switch itself is disclosed in an addendum most investors never open; the effect — a fresh, flattering start line — is what actually reaches the marketing material.

Nikhil never noticed his own fund’s benchmark had changed three years earlier, because nothing about the factsheet’s layout signals a discontinuity — the “outperformance” figure simply continues, computed against a new comparison point, formatted identically to the years before it. The addendum announcing the change went out as a routine regulatory filing, the kind of document distributors rarely walk clients through and most investors never read at all. By the time Nikhil’s advisor mentioned it in passing, years of retirement planning had already been built on a number that quietly meant something different from what it used to.

The compounding of a small flattery

1.4% a year sounds petty. On a ₹10,000 monthly SIP over 15 years, the difference between 12% and 13.4% is about ₹7.3 lakh — the size of the mirage the old benchmarking created in investors’ minds when they extrapolated “outperformance” into their planning.

Run your own numbers, right here

YOU ENTER the return rate you actually want to plan around and the years you’ll invest; IT TELLS YOU what your corpus becomes at that honest rate, so you can compare it directly against whatever “outperformance” figure a factsheet is currently advertising. What the calculator settles is simple: plan on your own verified number, not on someone else’s chosen yardstick.

What ten years of the wrong yardstick costs

Nikhil planned his retirement corpus around the “outperformance” his fund’s factsheet advertised for over a decade — first against a price index, then, after a quiet benchmark change he never noticed, against a fresh comparison starting from a more convenient date. Both numbers flattered the same underlying, roughly market-matching fund. The real cost isn’t the fee difference between an index fund and this one; it’s a decade of planning around a growth rate the fund was never actually delivering, discovered only when the retirement math stopped closing.

How to protect yourself

Check any fund’s benchmark name for the letters TRI — post-2018 factsheets must use it. Distrust any long-term “alpha” claim that reaches back before 2018 without adjustment, and always check the fund’s addendum history for a benchmark change before trusting a recent “outperformance since” figure — it may simply mark the date the comparison got easier, not the date the fund got better. When a seller quotes outperformance, ask: against which index, measured from when, and has that index ever changed? Watch how fast the conversation changes. And anchor your own plans on your own realised CAGR, not on anyone’s chosen yardstick.

What this does not mean

None of this means every benchmark change is manipulative. SEBI’s own categorisation rules sometimes require a fund to adopt a more appropriate benchmark as its strategy evolves, and a genuine strategy shift can legitimately justify a new comparison. The point is narrower: a benchmark change resets the “since” clock on every performance chart that follows it, and a factsheet that highlights the new number without disclosing the switch is using a real rule to create a misleading impression. It also doesn’t mean every investor needs to audit every addendum for every fund they hold. A once-a-year check, done at the same time you’d review any other part of your portfolio, is genuinely enough to catch a change that matters before it quietly reshapes a decade of financial assumptions.

Frequently asked questions

But didn’t some funds really beat the market fairly?

Genuine outperformance against an honest, unchanged TRI benchmark over a full market cycle is real and worth crediting, and a genuine track record like that deserves recognition. The issue is never that skill is impossible; it’s that the yardstick used to prove it is sometimes chosen for the answer it gives, rather than for its accuracy.

Is TRI benchmarking now universal?

For SEBI-regulated mutual funds, yes, and has been since 2018. For WhatsApp forwards, seminar slides and informal sales pitches — enforcement is entirely up to you.

How would I even notice a benchmark had changed?

Check the fund’s addendum archive on the AMC’s own website, or compare the benchmark named in this year’s factsheet against one from three or four years ago — a mismatch is the tell, even if the fund never drew attention to it, and most AMC websites keep a searchable, publicly accessible addendum history going back well over a decade.

Disclaimer: Nikhil Rajadhyaksha is a composite character based on common mutual-fund-factsheet reading patterns, not a real person. This article is for general information only and is not financial or tax advice. Consult a qualified advisor before making investment or tax decisions.