Was 20% a good year?

Watch the comparison.

You invested ₹1,00,000 in shares and a year later it's worth ₹1,20,000. A **20%** return sounds great.

But the Nifty rose **30%** in the same year. Simply holding the market would have earned more. Your 20% was actually **behind the market**. An index you compare yourself with like this is called a **benchmark**.

Race the index for a year

Drag through the twelve months.

Follow your portfolio and the index month by month. Who's ahead?

Made-up path, ending at the example's +20% and +30%.

Beat it, match it or trail it

Pick how the market did, then set your return.

A return only means something next to the benchmark. Try a few combinations.

**Remember:** beating the index means doing better than it, even in a year when both lose money.

Why the index is hard to beat

Switch between the two funds.

Most investors aim to beat the index. Most don't manage it over long periods, largely because of **costs**. An **index fund** doesn't try to beat the market: it simply holds the index's stocks, cheaply.

US example: 7% a year assumed for 20 years, with typical costs. Real returns vary.

Pick a fair benchmark

• Like with like — Compare bank shares with a bank index, and a broad portfolio with the Nifty or Sensex. Next lesson covers indices for single industries.
• The same period — Your year against the index's same year, never against a different stretch of time.
• Count dividends on both sides — Professionals use a version of the index that adds back dividends, so it's fair to compare with a portfolio that received them.

A simple test: track your picks for a year, then compare them with what an index fund would have done. If the index wins, that's useful to know.

Check — Question 3 of 4

Put each comparison where it belongs.

What you now know

• A benchmark is an index you compare your returns with.
• A return only means something next to the benchmark for the same period.
• Beating the index means doing better than it, even in a falling year.
• Most investors aim to beat the index; over long periods, most don't.
• Index funds hold the index cheaply, and costs make them hard to beat.
• Pick a fair benchmark: similar holdings, the same period, dividends counted.