When ‘beats the category’ means almost nothing.

A fund factsheet from any AMC’s website will tell you what the fund returned and what its “category average” returned. The implicit comparison is — this fund beat the average, therefore this fund is good. The implicit comparison is, in most cases, almost meaningless. The category average is a single number summarising a distribution that the reader does not see. Whether beating it is impressive depends entirely on how wide that distribution is.

Take the Flexi Cap category. As of the most recent month-end, the AMFI Flexi Cap classification contains 37 schemes (regular plans, ignoring direct/IDCW variants). Across the rolling 3-year window, the spread between the best and worst performer in that category is roughly 14 percentage points per annum. The category average sits somewhere in the middle. A fund that “beat the category average by one percentage point” could be the worst of the top half, the best of the bottom half, or anything in between. The factsheet does not tell you which.

What the average loses

Imagine four funds in a four-fund category, each over the same three years:

Fund A: 18.5%. Fund B: 16.0%. Fund C: 12.0%. Fund D: 6.5%. The category average is 13.25%.

Funds A, B and C all “beat the average.” The factsheets of all three carry the same green tick. In reality, A and B inhabit a completely different tier from C. C beat the average by 0.75 percentage points; B beat it by 2.75; A beat it by 5.25. The factsheet flattens this into a binary.

The 4-quartile alternative

Rank the same four funds. Q1 (the top quarter): Fund A. Q2: Fund B. Q3: Fund C. Q4: Fund D. Now the comparison shifts. C “beat the average” but is third out of four. A is top of category. B is upper-half but materially behind A. D is the bottom. The quartile framing recovers the information the average destroyed.

Run this on real AMFI categories and the difference is even larger. The Flexi Cap example above has 37 schemes, so each quartile contains roughly nine funds. A Q1 Flexi Cap fund is in the top nine of thirty-seven. A Q2 Flexi Cap fund is in the middle pack. A “beats the category average” tag describes either. The two have substantively different track records.

The quartile framing recovers the information the average destroyed.

What this changes in practice

Across every report we publish — the screener, the fund-detail pages, the Client Report Card — performance is always shown alongside its quartile cohort, not its category average. A fund’s 3-year CAGR appears next to the median of its top-quartile peers and the median of its full category. The reader sees three numbers: this fund, the fund needed to clear top-quartile in this category, and the broad average. The first two are usually the useful comparison.

This is not novel. Institutional fund-of-fund desks have reported quartile rank for decades. What is novel for the Indian retail surface is that the quartile is shown plainly, on a public page, against a backbone of AMFI scheme-level data anyone can verify. We pre-compute quartile boundaries monthly from the full universe of regular-plan schemes in each AMFI sub-category, then display each fund’s quartile membership for the 1Y / 3Y / 5Y windows.

Two caveats

The quartile framing is more honest than the average, but it has its own limits. Two worth flagging.

One: quartiles describe relative position within the category, not absolute return quality. In a year when the whole Flexi Cap category returns 4 per cent, the Q1 Flexi Cap fund returning 6 per cent is still only earning a Q1-of-a-bad-year return. The quartile flag does not tell you the category had a soft year — you have to read the absolute number alongside.

Two: quartile membership changes. A fund in Q1 today may slip to Q2 next quarter, particularly if the boundaries tighten (a common phenomenon when a new high-performer enters the category). A long-run Q1 fund is more meaningful than a one-window Q1 fund. We report both the current quartile and the share of the last twelve quarterly observations spent in Q1, so the reader can distinguish “consistently strong” from “happens to be strong right now.”

Why the average persists

If the quartile reading is more useful, why is the “beats the category average” framing universal? Two reasons, neither flattering.

First, every fund whose return is at all above the average — even slightly — can claim the green tick. The average is, by construction, exceeded by roughly half the category. That makes it useful as a marketing line for a much wider set of funds than the quartile framing would allow.

Second, the average is a single number. It travels well in print and on social media. The quartile reading requires the reader to see at least three numbers and understand what each means. That is more friction than most retail-facing summaries can bear. The cost of the lower friction is the lost information.

That is the trade we have chosen to refuse. Friction is fine if the information it preserves changes the decision. In our reading of the data, it does. A reader who learns to ask “which quartile?” before they ask “by how much above the average?” ends up with a materially different shortlist than a reader who works off averages alone.

That is the closest thing this piece has to a strategic implication. The methodology underneath the TRW Score reports quartile, not average. The factsheet convention is convenient; the quartile convention is honest. We have chosen the honest one and accept the cost.