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Financial Term of the week- Benchmark Index

The benchmark index for a particular mutual fund scheme is the index against which the scheme intends to measure its performance. For example, the NIFTY 50 index, which contains stocks of the companies that are ranked amongst the top 50 in terms of market capitalisation. This is the index against which many large-cap funds are benchmarked. In other words, the large-cap fund will try to match the performance of this benchmark. At times it may over perform, and at other times it may underperform the benchmark.

It mandatory for all mutual fund schemes to declare the index against which their performance is benchmarked. And rightly so, the scheme information document mentions the benchmark index of the mutual fund scheme.

What is an index?

To gain more perspective, let us understand what an index is. For example, in the case of equities, there is the stock exchange where all the stocks of various companies are traded. Now, there are thousands of such companies listed in the stock exchange, and it becomes difficult to track their performances. Hence, the stock market indices club the same kind of stocks together. This clubbing can happen on the basis of market capitalisation, as seen above, or even sector. The value of the group of stocks becomes the value of the index and as the former fluctuates, so does the latter.

Below are some common benchmarks for fund categories-

Fund CategoryBenchmark Index
Large-capNIFTY 50 TRI/BSE Sensex TRI
Small-capNIFTY small cap 250 TRI

Please note that the above indices are only examples of the benchmarks and not a comprehensive list.

How to use the benchmark to gauge a fund’s performance?

  1. Comparing a mutual fund scheme’s performance against its benchmark is only one of the ways to gauge the fund’s performance and in no way the only factor to consider.
  2. It is advisable to look at the long term returns of both the benchmark and the mutual fund scheme, when comparing.
  3. Always, measure the performance of the fund in question for at least 2-3 market cycles of ups and downs. That will give a fair idea of how the fund performs against the benchmark.
  4. While it is relevant that when the market is positive and indices are showing an upward growth, your fund should ideally do the same; the other very relevant thing is the downside performance. When the market is bear-ish, your fund should be able to hold its own and limit its losses vis-à-vis the benchmark. Hence, while the peaks are relevant, so is the extent of troughs.

In conclusion-

A benchmark index may help you in gauging the fund’s performance, but it is relevant to look at the more holistic picture. It is advisable to consider other measures of performance like alpha, beta, standard deviation also and then take a call. Please feel free to contact your mutual fund distributor for any further queries.


Disclaimer:
Helpful information for investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/ Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in . For more info on KYC, change in various details & redressal of complaints, visit mf.nipponindiaim.com/investoreducation/what-to-know-when-investing This is an investor education and awareness initiative by Nippon India Mutual Fund.

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
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While utmost care has been taken in translating the article into respective regional language(s), in case of any confusion or difference of opinion, article available in English language should be deemed as final. The article provided herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional advice for the readers. The document has been prepared on the basis of publicly available data/ information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of loss of profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this article.
"ABOVE ILLUSTRATIONS ARE ONLY FOR UNDERSTANDING, IT IS NOT DIRECTLY OR INDIRECTLY RELATED TO THE PERFORMANCE OF ANY SCHEME OF NIMF. THE VIEWS EXPRESSED HEREIN CONSTITUTE ONLY THE OPINIONS AND DO NOT CONSTITUTE ANY GUIDELINES OR RECOMMENDATION ON ANY COURSE OF ACTION TO BE FOLLOWED BY THE READER. THIS INFORMATION IS MEANT FOR GENERAL READING PURPOSES ONLY AND IS NOT MEANT TO SERVE AS A PROFESSIONAL GUIDE FOR THE READERS."

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
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