What is a Mutual Fund Benchmark?

Posted On Tuesday, Oct 10, 2017


Back in the days, if you recall going home to break your exam results to your parents, it wasn’t an easy thing to do. After scoring 60% in one of the papers which was rather tough, you come up with a range of explanations making your parents understand how difficult the paper was. You then go on to claim that most of your classmates scored lower marks or that the class topper scored 68% which wasn’t too far from your own score. But, after giving all the valid reasons to convince them that the paper was a tough nut to crack, you are however reprimanded for not performing well. Surely, you would be disappointed that they are not trying to reason with you as to how tough the paper was.

Now take for instance a mutual fund’s performance for the past one year period. It came down 7.5% during that period. In this case would it be right to say that the fund performed badly? It would be fair to compare the fund’s performance to a standard as you compared your performance to that of your classmates. A standard is thus the fund’s benchmark that helps to facilitate the understanding of any performance.

What is a Benchmark?
It is but a common thing that an investor would notice in his/her inbox on a regular basis, the various marketing communication emails and mutual fund advertisements declared by fund houses that particular funds have earned XX% returns and that if invested in such funds, investors would earn such returns. It is important to understand the significance of using a benchmark for the purpose of effective comparison which sadly many investors fail to understand. Since 2012, for the sake of standardization, SEBI (Securities and Exchange Board of India) has made it mandatory for fund houses to declare a  similar return in INR and by way of CAGR in addition to the scheme benchmark performance.

A scheme's benchmark is an index that is decided by its fund house to serve as a standard for the scheme's returns. The BSE Sensex and Nifty are the most generally used benchmarks in India for mutual fund investments. Other benchmarks are Nifty 500, Nifty 100, CNX Midcap, CNX Smallcap, S&P BSE 200 etc. Investors are given an opportunity to compare the performance of their investments with that of the broader market. Take for instance you are investing in a diversified equity fund that is benchmarked against the BSE Sensex. Its returns are thus compared with that of BSE Sensex. Hence a large-cap fund’s performance needs to be compared against a large-cap benchmark and vice-versa. Once you know the performance, you can decide whether to enter or exit a mutual fund.

Mutual Fund Performance with respect to the Benchmark
This is always the case that a mutual fund gets hit with force whenever the market scales new heights or comes crashing down. Let’s take for instance a diversified equity fund -  Fund A is benchmarked against the Sensex. Its returns are hence compared with that of the Sensex. Now suppose the fund achieved 40% returns though the Sensex earned 50% returns, it would mean that Fund A underperformed its benchmark. While on the other hand, if the fund achieved 50% returns and the Sensex generated only 30%, it would mean that Fund A outperformed its benchmark. There are some situations where a fund generates similar returns as that of its benchmark. Such cases are said to be considered as fund underperformances as the main intent of actively managed equity mutual fund investing is to perform better than the benchmark.  

Outperformed or Underperformed

Mutual Fund Performance with respect to the Benchmark
If returns are greater than its benchmark returnsFund has outperformed
If returns are lesser than its benchmark returnsFund has underperformed

A benchmark is an important tool that helps to measure a fund’s performance. To avoid any misunderstandings, an appropriate benchmark needs to be selected. Keep in mind that a benchmark performance is not the only criterion to select a mutual fund to invest in. Therefore, consult your financial advisor, understand your own risk appetite and assess your needs before taking any investment decisions.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.

Mutual fund investments are subject to market risks read all scheme related documents carefully.

Please visit – www.QuantumMF.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

Above article is authored by Quantum.

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