• The return owing to active decisions taken by the management and the decisions made by the portfolio manager.
• Return that is simply a function or outcome of the movement of the market.
A portfolio might show higher returns but care would need to be then taken, if it is actually because of the general market movement or a significant effort of the management that has gone behind this.
The return because of the movements in the market can be called benchmark return, say BR.
Active Return (AR) = Net Return (NR) – Benchmark Return (BR)
Benchmark returns are typically taken from index funds such as Nifty 50, Sensex 30 etc.
As one can observe, AR can be positive or negative. A positive active return would imply good results as highlighted by the efforts of the management and a negative active return would generally mean poor efforts in decision making.