It's a message I get on WhatsApp surprisingly often. "Sensex went up today, but my fund is down. What's going on?" There's usually a screenshot of the news headline and a screenshot of the app, side by side, and a sense that something must be wrong. Almost always, nothing is. The Sensex and your fund are simply measuring different things.
It's a fair question. It just has a boring answer. Boring answers are good news in investing.
The Sensex isn't your fund
The Sensex tracks thirty large companies. The Nifty tracks fifty. Your fund might hold sixty companies, or forty, or include mid-sized and small companies that aren't in either index at all.
So on a day when those thirty or fifty big names go up, your fund's holdings may do something different. Our page on what Nifty and Sensex are explains what they actually measure.
Think of a school's overall result and your child's marks. The school average can go up in a year your child had a tough exam. Both numbers are true.
Reason 1: your fund holds different companies
This is the most common reason.
If you hold a mid cap or small cap fund, it mostly owns companies that aren't in the Sensex. On many days, large and smaller companies move in different directions. The Sensex can rise on the back of a few big banks while mid-sized companies fall.
Even a large cap fund may hold the index companies in different proportions, or hold a few that aren't in the index. Our page on large, mid and small cap funds explains the size groups.
Reason 2: timing of the NAV
Your fund's NAV is calculated once, after the market closes. The news headline might be showing the market in the middle of the day, or comparing with a different time.
Also, apps sometimes show yesterday's NAV until today's is published late in the evening. So you may be comparing today's market with yesterday's fund value without realising it. Our page on what NAV is explains how and when it's calculated.
Reason 3: it isn't an equity fund
If you hold a debt fund, a hybrid fund, a gold fund or an international fund, the Sensex has little to do with it.
A debt fund moves with interest rates. A gold fund moves with gold prices. An international fund moves with overseas markets and the rupee. On a day the Sensex rises, any of these can fall, and nothing is wrong.
Reason 4: a dividend payout or a scheme event
If your fund is in an IDCW option and paid out a distribution, the NAV drops by roughly that amount on the record date. It looks like a fall, but the money went to you, or was reinvested. Our page on growth versus IDCW explains this.
Reason 5: the fund manager made different choices
An active fund manager deliberately holds different companies from the index, hoping to do better over time. On some days, and some months, those choices lag the index. On others, they lead it.
That's the nature of active management. Nobody picks right every week. Not the best managers, not anyone. What you're paying for, if you choose an active fund, is a decent record over a full market cycle of five or more years, with good years and bad years both included, not a fund that beats the Sensex on the particular evening you happened to open the app. What matters is how the fund does against its benchmark over years, not on one day. Our page on active versus passive funds covers this trade-off.
Reason 6: an international or sector tilt
Some funds hold a slice of overseas shares, or lean heavily towards one sector like banking, pharma or IT.
If that sector or that overseas market had a bad day while the Sensex was pulled up by other sectors, your fund will lag. A sectoral fund can go the opposite way to the whole market for weeks. Our page on sectoral and thematic funds explains why they can behave so differently.
What it looks like over a longer stretch
Here's the thing. Over one day, a fund and the index can differ a lot. Over a year, the gap usually narrows. Over five years, a diversified equity fund tends to move broadly with the market, sometimes a bit ahead, sometimes a bit behind.
That's why the useful comparison is always over years, and always against the right benchmark.
When a difference is worth paying attention to
One day means nothing. One month means very little. Here's when it's worth a closer look.
- Your fund has lagged its own benchmark clearly for three years or more.
- Other funds in the same category did noticeably better over the same long period.
- The fund manager or the fund's objective has changed.
Our page on how to review your portfolio gives a simple once-a-year way to check.
What about index funds?
If you hold a Nifty 50 index fund, it should move almost exactly with the Nifty. If it falls on a day the Nifty rises, check the NAV date first. It's almost always a timing difference.
Over time, an index fund will trail its index by a tiny amount because of costs. That's normal. Our page on tracking error explains how small that gap should be.
Compare with the right benchmark
Every fund names its own benchmark, and it's often not the Sensex. A flexi cap fund might use a broad index of five hundred companies. A small cap fund uses a small cap index.
Comparing a small cap fund with the Sensex is like comparing a cricket team's score with a football team's. Both are numbers. They just aren't the same game. Our page on the benchmark shows how to find the right one.
Why the daily comparison hurts
Checking your fund against the Sensex every evening feels like staying informed. In practice it creates worry and pushes people towards bad decisions, like switching funds after a few weak days.
Most long-term investors do better looking once a year. Our page on your SIP when the market falls explains why daily watching usually costs money.
What I tell people who message me
Usually, three quick questions settle it.
What kind of fund is it? What is its benchmark? And are we comparing today's market with today's NAV, or yesterday's?
Nine times out of ten, the answer to one of these explains the whole thing within a minute. Really. A minute. The tenth time, it's a fund that has lagged for years, and that's a conversation worth having calmly, not on the day the news made you nervous.
A simple way to think about it
The Sensex is the weather report for the city. Your fund is the weather in your own street. Most days they're similar. Some days your street gets rain when the city report says sunny. Over a whole year, they tend to follow the same seasons.
If you'd like help understanding what your funds hold and what they should be compared against, I'm happy to look. Myfolios is an AMFI-registered mutual fund distributor (ARN-145870) working from Indore since 2014. Get in touch.
