Category Average vs Top Fund - What Should You Compare Against

"My fund gave 22% last year. Is that good?"

We get this question almost daily in our WhatsApp community. And our answer is always the same: compared to what?

A 22% return sounds impressive. But what if similar funds averaged 28%? Suddenly, your fund looks weak. What if the market index returned only 15%? Now 22% looks excellent.

This is why raw numbers mean nothing without context. The comparison point you choose changes everything about how you evaluate your investments.

At Belong, we have spent years helping NRIs cut through misleading performance claims. We have seen too many investors chase "top performing" funds only to watch those same funds crash back to earth a year later.

In this guide, we will show you exactly how to compare mutual fund performance. 

You will learn why most investors compare wrong, what the data actually shows, and how to evaluate your portfolio like a professional. By the end, you will never look at fund performance the same way again.

The Real Question Behind Every Fund Comparison

When you compare mutual fund performance, you are really asking one of three questions:

"Is this fund worth its fees?" This is answered by comparing against the benchmark.

"How does this fund rank among similar funds?" This is answered by comparing against the category average.

"Could I have done better?" This is answered by looking at top performers.

Each question has value. But only one consistently leads to better investment decisions.

Here is what we have learned from working with thousands of NRI investors: most people focus on the wrong comparison. They chase top performers, ignore benchmarks, and wonder why their portfolio disappoints them five years later.

Let us fix that.

👉 Tip: Before investing in any mutual fund, write down what you will compare it against. If you cannot define your benchmark, you cannot evaluate performance.

Why Benchmark Comparison Matters Most

Every mutual fund in India must declare a benchmark index. This is not a suggestion. SEBI mandates it.

The benchmark represents the market your fund invests in. For a large-cap fund, it might be the Nifty 50 TRI. For a mid-cap fund, the Nifty Midcap 150 TRI.

The letters "TRI" stand for Total Return Index. This includes dividends reinvested. Since 2018, SEBI requires all benchmarks to use TRI versions. This gives you the complete picture of what the market actually returned.

Why does benchmark comparison matter so much?

Because it answers the fundamental question: Is your fund manager earning their fees?

If you pay 1.5% expense ratio for an actively managed fund that matches the Nifty 50 TRI, you have paid for nothing. A Nifty 50 index fund charges 0.1% and delivers the same result.

The data here is sobering. According to the SPIVA India Mid-Year 2025 report:

Large-cap funds: 66% underperformed their benchmark in H1 2025. Over 10 years, 73% underperformed.

Mid/Small-cap funds: 82% underperformed over 10 years.

ELSS funds: 87% underperformed over 10 years.

Read those numbers again. If you picked an actively managed large-cap fund at random, you had roughly a 3 in 4 chance of underperforming the market over a decade.

This is why we tell every NRI investor: benchmark first, everything else second.

Common Benchmarks You Should Know

Different fund categories use different benchmarks. Here are the most common ones:

When you check your fund's factsheet, look for the benchmark listed. Then compare the fund's returns against that specific benchmark TRI over 3, 5, and 10 years.

If your fund consistently trails its benchmark by 1% or more, you have a problem.

👉 Tip: Always compare against the TRI version of the benchmark, not the price index. The TRI includes dividends and shows true market returns. Many fund marketing materials use the price index to make performance look better.

What Category Average Actually Tells You

The category average is the mean return of all funds in the same type. If there are 35 large-cap funds and their average return is 16%, that is your category average.

This comparison tells you: How does my fund rank among peers?

A fund returning 20% when the category averages 16% is doing well. The same fund returning 20% when the category averages 24% is lagging.

Category averages are useful for:

Relative ranking: Seeing if your fund is above or below the middle of the pack.

Filtering outliers: Identifying consistently strong or weak performers.

Category selection: Deciding which fund types might suit your goals better.

But category averages have a major limitation. They tell you how a fund performed against other fund managers. They do not tell you if the entire category was worth investing in.

We saw this clearly during 2022. Many small-cap funds beat the category average but still lost money. Being the best among losers does not make you a winner.

During market crashes, even "top quartile" funds show losses. During bull runs, even "bottom quartile" funds show gains. The category average moves with the market.

This is why we recommend using category average as a secondary filter, not your primary decision tool.

👉 Tip: First check if your fund beats its benchmark. Then check where it stands in the category. A fund that beats the benchmark but ranks in the bottom half of its category might have chosen an easy benchmark. Investigate further.

The Dangerous Seduction of Top Performers

Now we come to the comparison that gets most investors into trouble: top performers.

"This fund returned 35% last year." "This fund is ranked #1 in its category." "This fund manager beat everyone."

These statements feel compelling. Our brains are wired to seek winners.

But here is what decades of research consistently shows: top performers rarely stay on top.

The SPIVA Persistence Scorecard tracks this precisely:

Zero top-quartile large-cap funds from 2022 maintained their ranking through 2024.

Only 9% of above-median large-cap funds stayed above median for two consecutive years.

If performance were random, you would expect 25% to repeat. The actual number is far lower.

This phenomenon is called mean reversion. Extreme performance, good or bad, tends to move back toward average over time.

A CFA Institute study found something remarkable. They compared two hypothetical investors over 22 years. One invested only in top 10% funds. The other invested only in bottom 10% funds.

The "loser" funds delivered better subsequent returns.

This flies in the face of intuition. But it is backed by extensive data.

Why Yesterday's Winner Becomes Tomorrow's Loser

Mean reversion deserves deeper explanation because understanding it will transform how you invest.

Several forces drive mean reversion:

Luck versus skill: Short-term outperformance often comes from lucky bets on sectors or stocks that happened to rally. Luck does not persist.

Style cycles: A value-oriented fund might outperform when value stocks rally, then underperform when growth stocks take over. Styles rotate.

Crowding effect: When a fund becomes popular due to past performance, it attracts huge inflows. The manager must deploy this capital, often buying stocks at higher prices. This dilutes future returns.

Risk-taking: Some funds generate high returns by taking concentrated bets. This works until it does not. The higher the returns from risk, the higher the potential fall.

Jack Bogle, founder of Vanguard, called mean reversion "the iron law of financial markets."

Morningstar's "Buy the Unloved" research tested a contrarian strategy. They recommended buying fund categories that experienced the greatest investor outflows. These were funds people were selling most aggressively.

This strategy consistently beat the market over multiple years.

Why? Because investors sell what performed worst recently. But those same beaten-down funds often had better prospects ahead.

👉 Tip: If a fund dramatically outperformed for 2-3 consecutive years, ask why. If the answer is sector concentration or a few lucky stock picks, be cautious. Mean reversion is likely coming.

Risk-Adjusted Returns: The Smarter Comparison

Raw returns tell only half the story. Two funds might both deliver 18% returns. But if one achieved this with half the volatility, it is the superior fund.

This is where risk-adjusted metrics become essential.

Alpha: Measures how much a fund outperformed its benchmark after adjusting for risk. Positive alpha means the manager added value. Negative alpha means they destroyed value.

Beta: Measures volatility relative to the benchmark. A beta of 1.2 means the fund is 20% more volatile than the market. It rises more in up markets but falls more in down markets.

Sharpe Ratio: Measures return per unit of risk. Higher is better. Compare Sharpe ratios within the same category to find the most efficient performers.

Standard Deviation: Measures how much returns vary from average. Lower standard deviation means more consistent performance.

Maximum Drawdown: The largest peak-to-trough decline. A fund that fell 45% during a crash while peers fell 30% took excessive risk, even if it recovered well later.

According to Bajaj AMC, comparing Sharpe ratios within a category provides much clearer insight than comparing raw returns alone.

A fund with 15% return and Sharpe ratio of 1.2 is objectively better than a fund with 18% return and Sharpe ratio of 0.8. The first fund delivered more return for each unit of risk taken.

How We Evaluate Funds at Belong

Here is the framework we use when helping NRIs evaluate their portfolios:

Step 1: Benchmark Check

Compare the fund's 3-year and 5-year returns against its declared benchmark TRI. If the fund consistently lags by 1% or more, question why you own it.

Step 2: Category Ranking

Check if the fund ranks in the top half or bottom half of its category. Consistent bottom-half ranking over multiple years is a red flag.

Step 3: Rolling Returns Analysis

Point-to-point returns can be misleading based on start and end dates. Rolling returns show performance across multiple overlapping periods. A fund strong across different time windows is more reliable.

Step 4: Risk Metrics Review

Check Sharpe ratio, standard deviation, and maximum drawdown. Compare against category peers. Avoid funds that achieved returns through excessive risk.

Step 5: Expense Ratio Check

Higher costs require higher outperformance to justify. A fund with 2% expense ratio must beat a 0.5% expense ratio fund by 1.5% just to deliver the same net return.

Step 6: Fund Manager Tenure

If the current manager joined recently, the historical track record may not be relevant. Look for managers with at least 3-5 years running the fund.

Practical Comparison Table: What Each Method Reveals

Common Mistakes NRIs Make When Comparing Funds

Mistake 1: Comparing Different Categories

Never compare a small-cap fund to a large-cap fund. A small-cap fund returning 12% might be excellent if its category averaged 8%. A large-cap fund returning 12% might be poor if its benchmark returned 16%.

Always compare apples to apples.

Mistake 2: Focusing on 1-Year Returns

One year is noise. Even three years can be misleading. A fund might top the charts one year because a single sector bet paid off.

Focus on 5-year and 10-year track records. Check how the fund performed during crashes, not just rallies.

Mistake 3: Ignoring Expense Ratios

A 1% difference in expense ratio compounds significantly over time. Over 20 years, it can reduce your wealth by 20% or more.

When comparing two similar funds, the lower-cost option often wins over the long term.

Mistake 4: Buying Based on Star Ratings Alone

Morningstar and other agencies rate funds based on past risk-adjusted returns. A 5-star rating means the fund performed well historically.

But star ratings are backward-looking. Today's 5-star fund might be tomorrow's 3-star fund due to mean reversion.

Use ratings as a starting point, not a final decision.

Mistake 5: Panic Selling After Short-Term Underperformance

Even excellent fund managers have bad years. Sometimes their investment style goes out of favor temporarily.

If a fund underperforms for one year but has a strong 5-year track record and unchanged strategy, it might actually be a buying opportunity.

👉 Tip: Set a rule for yourself. Do not make any fund change based on less than 2 years of underperformance. Review annually, not quarterly.

A Tax-Smart Alternative: GIFT City Funds

For NRIs investing long-term, we often recommend considering GIFT City mutual funds.

These funds operate from India's GIFT City International Financial Services Centre and offer:

Zero capital gains tax: Unlike regular Indian mutual funds where NRIs pay 12.5% LTCG and 20% STCG, GIFT City funds have no capital gains tax for NRIs.

USD-denominated options: Invest in dollars without currency conversion hassles.

Professional management: Same fund houses and often similar strategies to domestic funds.

When comparing GIFT City funds, all the same principles apply. Check against benchmark. Compare within category. Evaluate risk-adjusted returns. Ignore last year's top performer.

The tax advantage alone can be significant. A GIFT City fund that merely matches its benchmark might deliver better after-tax returns than a regular fund that slightly beats its benchmark.

We help NRIs invest in options like DSP Global Equity Fund and Tata India Dynamic Equity Fund through our GIFT City platform.

Your Fund Evaluation Checklist

Use this checklist every time you evaluate a mutual fund:

If a fund fails multiple criteria, seriously consider replacing it with a better option or a low-cost index fund.

The Right Mental Framework

Here is how we think about fund comparison at Belong:

Benchmark is your minimum expectation. If a fund cannot beat its benchmark over 5 years, it has not earned its fees. Consider an index fund.

Category average shows relative skill. Consistent top-quartile performance suggests something beyond luck. Investigate further.

Top performer lists are entertainment. They tell you what happened, not what will happen. Treat them with skepticism.

Risk matters as much as return. Two funds with identical returns can have vastly different risk profiles. Always check Sharpe ratio and drawdowns.

Costs compound ruthlessly. A 1% expense difference costs you 20%+ over 20 years.

Persistence is rare. Do not assume today's winner will be tomorrow's winner.

Follow these principles and you will make better investment decisions than most investors who chase headlines and star ratings.

Your Next Steps

If you are an NRI looking to evaluate your mutual fund portfolio properly:

1. Audit your holdings. Use our checklist against each fund you own.

2. Replace consistent underperformers. If a fund has trailed its benchmark for 3+ years, make a change.

3. Consider tax efficiency. For long-term holdings, explore GIFT City mutual funds for their tax advantages.

4. Stay disciplined. Review annually. Ignore short-term noise. The best returns come from patience.

Have questions about comparing your specific funds? Join our WhatsApp community where NRIs discuss exactly these decisions every day.

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Sources

1. SPIVA India Mid-Year 2025: https://www.spglobal.com/spdji/en/spiva/article/spiva-india/
2. SEBI Mutual Fund Regulations: https://www.sebi.gov.in
3. CFA Institute Research: https://blogs.cfainstitute.org
4. Value Research: https://www.valueresearchonline.com
5. Bajaj AMC: https://www.bajajamc.com/knowledge-centre
6. Morningstar India: https://www.morningstar.in