As a mutual fund investor, you must have come across the advertisements and marketing communications saying that this fund X has delivered an astonishing return to the investors in a particular scheme, making them richer by Rs some lakh crore. You might feel elated and drifted towards the said fund. But, you need to do introspection of the details thoroughly and compare the performance of your mutual fund scheme with the broader market to actually know the status of your investment. The question now will be how to do it? The answer is the mutual fund benchmark that can help you know the growth and returns of the scheme. We, in this article, will put our focus on the concept of mutual fund benchmark.
Mutual Fund Benchmark
Mutual fund benchmark is a tool that helps compare the performance of a mutual fund with its competitors. The Securities and Exchange Board of India (SEBI), the market regulator, made it mandatory for asset management companies (AMCs) to declare a benchmark index in 2012. Based on the objectives of the fund, this independent benchmark is created. The 50-share BSE Sensex and 30-share NSE Nifty are among the most widely followed benchmarks for large cap funds. Other indexes followed by the funds include CNX Smallcap, CNX Midcap, CNX 500, CNX IT, BSE 100, BSE 200, etc. So if you have invested in an equity fund benchmarked against the NSE Nifty, the return of the fund will be compared with that of NSE Nifty.
Judging performance in reference to benchmark
If your fund has delivered returns lesser than the benchmark, then it is believed to have underperformed. However, if the returns of the fund is more than the benchmark, then it means the fund has outperformed. If the fall in the NAV of your fund is lesser than the benchmark index during the period, then the performance of the fund can still be said better than the benchmark. However, if the returns from your fund is in line with the benchmark, then it would mean that the fund has underperformed because the fund manager has imposed a fee and provided returns equal to a passively managed index fund that does not have the assistance of fund manager.
How can you measure performance?
You must look at the historical returns of your fund to know whether it has outperformed or fall shorter of the benchmark. Beta is a unit by which your fund performance is measured in relation to the benchmark. If the beta of your fund is 1.20, you can then expect 20 per cent more return than the benchmark in the upswing market and 20 per cent less than the benchmark in the falling market. Beta of 1 represents the rise or fall of the fund in proportion to the benchmark. You must take a reasonable time frame of say 1 to 5 years to compare the performance of the mutual fund scheme with the benchmark.