It is going to become easier for investors to compare the performance of mutual fund schemes going forward. To facilitate this, the market regulator Securities & Exchange Board of India (SEBI) has proposed standardization of mutual funds via a two-tiered structure. This will ensure uniformity in benchmarking the mutual fund schemes.
In the circular, the market regulator informed, "the first-tier benchmark will be reflective of the category of the scheme while the second tier should be demonstrative of the investment style or strategy of the fund manager. The new benchmarking will be implemented from January 1."
It also noted that all benchmarks should follow the total return index (TRI) which will make the comparison easy. The market regulator had asked fund houses to adopt the TRI method to measure the performances of mutual fund schemes in 2018.
TRI includes the calculations of dividends along with the stock price movements. Before 2018, mutual fund schemes used the price return index (PRI), which only focussed on the returns of the stocks.
So how will this new benchmarking work?
Currently, the mutual fund schemes are assessed with indices like Nifty, Sensex as the benchmark or by comparing returns of two fund schemes.
Now, all funds under the Tier 1 category will be based on a broad index. In the case of equity fund schemes, schemes could use one of the broad market indexes like S&P BSE 100 Index or the NSE 100 Index, Nifty50 index, Sensex index as Tier 1 for large-cap fund category.
In the case of debt funds, for example in the ultra-short duration fund category, investors could choose from the Nifty Ultra Short Duration Debt Index or Crisil Ultra Short Term Debt Index, Sebi stated.
"As regards hybrid and solution-oriented schemes there would be a single benchmark-broad market benchmark wherever available. Otherwise, a bespoke index will be created for schemes that would then be applicable across the industry," added Sebi.
It further stated that for sectoral schemes, there would be a single benchmark of the schemes according to the sector. With regard to index funds and ETFs also, there would be a single benchmark.
The circular also added that the second tier benchmark is optional and shall be decided by the asset management companies. As per experts, it will be interesting to see the kinds of benchmarks fund houses make for tier 2.
If a fund house chooses a create a Tier 2 benchmark, its strategy will be clearly defined by the fund house making it easier to choose for investors to choose fund schemes from under this that suit their investment plan and risk appetite appropriately.
For instance, a fund house creates a tier 2 benchmark made up of banking and IT stocks which is the strategy of the scheme. Now, an investor looking to invest in a combination of banking and IT stocks may easily choose one such scheme and compare the returns generated with the tier 2 benchmark which was created by the fund and not just compare the scheme with a broader index.
This new benchmarking of mutual fund schemes will help investors compare their chosen fund schemes with proper benchmarks rather than the index or just comparing with other similar schemes.