How Benchmark Choice Changes PMS Outperformance

Why It Matters

Benchmark selection directly influences perceived performance, affecting investor decisions and the credibility of active management in India’s fast‑growing PMS market.

Key Takeaways

• Mid‑cap PMS outperformance falls from 47% to 0% with proper benchmarks
• Only 33‑43% of large‑cap strategies beat any benchmark
• Broad APMI indices inflate perceived alpha for small‑cap strategies
• SEBI’s 2023 rule caps PMS benchmarks at three broad indices
• Category‑aligned benchmarks reveal true stock‑picking skill

Pulse Analysis

The PMS sector has become a cornerstone of wealth management for India’s affluent, with assets under management now exceeding $100 billion. Unlike mutual funds, PMS providers enjoy flexibility in benchmark choice, a freedom that SEBI began to curb in 2023 by limiting each equity strategy to three broad indices—Nifty 50 TRI, S&P BSE 500 TRI, and MSEI SX 40. This regulatory shift aimed to improve comparability, yet many managers still default to these generic benchmarks, which can mask the true risk‑return profile of their portfolios.

A recent study of 403 equity PMS strategies reveals stark disparities when performance is measured against category‑specific benchmarks. Mid‑cap funds, which appeared to outperform in 47% of cases using APMI indices, show zero outperformance over three‑ and five‑year horizons against a dedicated mid‑cap index. Small‑cap strategies similarly benefit from broader benchmarks, with outperformance jumping to 75% over five years when compared to the Nifty 50 TRI. In contrast, large‑cap and multi‑cap strategies exhibit only modest differences, underscoring that the benchmark effect is most pronounced in niche market‑cap segments.

The findings highlight a structural gap: the PMS ecosystem lacks a transparent, SPIVA‑style framework that routinely reports active versus benchmark performance. Introducing category‑aligned benchmark reporting would give investors a clearer view of genuine alpha, curb selective benchmark selection, and foster healthier competition among PMS managers. As the market matures, regulators and industry bodies may need to mandate such disclosures to sustain investor confidence and ensure that PMS outperformance claims are rooted in comparable, market‑relevant metrics.