Alpha and Why the Benchmark Matters

Alpha is the return a fund generated beyond what its benchmark exposure would explain. Positive alpha suggests the manager added value; negative suggests you paid active fees for less than the index delivered.

Compare against the correct index

A mid-cap fund measured against the Nifty 50 will look brilliant in a mid-cap rally and dreadful when large caps lead — and neither reveals anything about skill. SEBI requires funds to disclose a benchmark; check it is genuinely representative of the mandate.

Total Return Index

Funds must now benchmark against the Total Return Index (TRI), which includes dividends reinvested. Older comparisons against a price-only index flattered active funds by roughly the dividend yield each year.

Alpha is not persistent

The uncomfortable finding across markets is that past alpha is a weak predictor of future alpha. Costs, by contrast, persist reliably. That asymmetry is the core argument for indexing, especially in large caps.