Benchmark outperformance is treated as a fact about a manager. Before February 2018 in India it was partly a fact about the benchmark, which excluded dividends entirely.
Until 1 February 2018, mutual fund schemes benchmarked against Price Return indices - tracking capital appreciation and leaving out every dividend paid by the companies inside them. SEBI’s circular of 4 January 2018 (SEBI/HO/IMD/DF3/CIR/P/2018/04) required every scheme to switch to the Total Return Index version instead. What follows concerns the size of the gap that closed and what it means for track records spanning the change.
The Gap Was Roughly 1.4 Points a Year
Over the Sensex’s last 43 years:
- Price Return CAGR: 15.5% - capital appreciation only.
- Total Return CAGR: 16.9% - the same index with dividends reinvested, roughly a 1.4-point annual gap.
A fund exactly matching the Sensex’s price movement - no stock-picking skill relative to the market at all - was reported under the old rule as matching its benchmark. Against the market’s actual total return, that same fund trailed by 1.4 percentage points every year.
Compounded, It Is Not a Rounding Error
₹1,00,000 compounded at the Sensex’s 43-year price-return CAGR (15.5%) versus its total-return CAGR (16.9%, dividends reinvested) over 20 years.
₹1,00,000 growing at 15.5% for 20 years reaches ₹17.85 lakh. The same sum at 16.9% reaches ₹22.71 lakh - a ₹4.86 lakh difference on the identical market, arising entirely from dividends the old benchmark never counted.
Restated as a hurdle: any fund beating its price benchmark by less than roughly 1.4 points a year was, on a true total-return basis, behind the market it was reported as having beaten.
Nobody Was Manipulating Anything
This was not gaming. The price index was the flawed yardstick every scheme used and every investor compared against, applied consistently and in good faith across the industry.
That is what makes it a structural problem rather than a conduct one - and why it could persist for decades without anyone having to conceal it.
The Fix Was Prospective
SEBI corrected the yardstick from 1 February 2018 forward without restating performance reported before that date. Pre-2018 track records therefore remain stated against the old benchmark, and comparing them directly against post-2018 figures compares two different measurement regimes.
The 1.4-point figure is a 43-year Sensex average rather than a constant - dividend yields move with the market and differ by index and period. The direction holds for any pre-2018 window.
What This Means for Allocators
Add the dividend yield back before crediting any pre-2018 outperformance. The adjustment is approximate, and it is closer to correct than the reported figure.
Do not compare pre- and post-2018 alpha in the same series without flagging the break. The benchmark changed underneath the track record.
And check which index version a benchmark cites even now. Total Return is the rule for Indian schemes; it is not universal across every comparison an allocator will encounter.
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