At the time of investing in a mutual fund, it is vital to know which is the market index against which the fund’s performance will be measured. It is a reference point against which the fund’s performance is evaluated.
For instance, the performance of a large cap fund can be compared against S&P BSE Sensex of Nifty50. Similarly, a mid-cap mutual fund can be compared against Nifty midcap 50 index.
It is important to note that a sectoral fund must have a sectoral index as benchmark, thematic fund is benchmarked against thematic index, and a debt fund will have a fixed interest index as benchmark.
“The benchmark can act as an indicator of the underlying portfolio where the funds are likely to invest in large caps companies or a mix of large & mid-cap where there are more than 100 or 250 companies,” says Harshad Chetanwala, Co-Founder of MyWealthGrowth.
What is a benchmark index?
Having a benchmark index gives investors an idea of the performance of a fund which includes the choice of constituent stocks, proportion in which funds have been allocated, and the rate of appreciation in the price of constituent stocks, etc.
Illustration: The three-year return of DSP Top 100 Equity Fund was 19.52 percent (direct) whereas the benchmark index (S&P BSE 100 TRI) posted a return of 21.37 percent, as per the AMFI (Association of Mutual Funds of India) data on Oct 8, 2021.
Similarly, Edelweiss Large Cap Fund posted a three-year return of 22.02 percent and the benchmark index (Nifty 50 TRI) posted 21.43 percent.
In the example of DSP Fund, the performance lagged behind that of benchmark, whereas Edelweiss managed to beat the benchmark, albeit marginally, in its three-year performance.
“In the last couple of years, many funds have underperformed their benchmark as few stocks within the benchmark had a phenomenal return. These stocks may be a part of a mutual fund’s portfolio but their weightage may be lesser than that of an index and this has a direct impact on the performance of the funds” adds Chetanwala.
Beating the benchmark index
When the benchmark index rises by 5 percent (say), and the fund rises by 6.7 percent, it means the fund has outperformed the benchmark index during that year. In case the trend continues for the next three years, the fund is seen to be consistently outperforming the benchmark.
At the same time, during a downturn if the fund fell at a rate slower than that of benchmark index, then also, the fund is seen to be outperforming the index.
At the time of investing in a mutual fund, it is vital to know which is the market index against which the fund’s performance will be measured. It is a reference point against which the fund’s performance is evaluated.
For instance, the performance of a large cap fund can be compared against S&P BSE Sensex of Nifty50. Similarly, a mid-cap mutual fund can be compared against Nifty midcap 50 index.
It is important to note that a sectoral fund must have a sectoral index as benchmark, thematic fund is benchmarked against thematic index, and a debt fund will have a fixed interest index as benchmark.
“The benchmark can act as an indicator of the underlying portfolio where the funds are likely to invest in large caps companies or a mix of large & mid-cap where there are more than 100 or 250 companies,” says Harshad Chetanwala, Co-Founder of MyWealthGrowth.
What is a benchmark index?
Having a benchmark index gives investors an idea of the performance of a fund which includes the choice of constituent stocks, proportion in which funds have been allocated, and the rate of appreciation in the price of constituent stocks, etc.
Illustration: The three-year return of DSP Top 100 Equity Fund was 19.52 percent (direct) whereas the benchmark index (S&P BSE 100 TRI) posted a return of 21.37 percent, as per the AMFI (Association of Mutual Funds of India) data on Oct 8, 2021.
Similarly, Edelweiss Large Cap Fund posted a three-year return of 22.02 percent and the benchmark index (Nifty 50 TRI) posted 21.43 percent.
In the example of DSP Fund, the performance lagged behind that of benchmark, whereas Edelweiss managed to beat the benchmark, albeit marginally, in its three-year performance.
“In the last couple of years, many funds have underperformed their benchmark as few stocks within the benchmark had a phenomenal return. These stocks may be a part of a mutual fund’s portfolio but their weightage may be lesser than that of an index and this has a direct impact on the performance of the funds” adds Chetanwala.
Beating the benchmark index
When the benchmark index rises by 5 percent (say), and the fund rises by 6.7 percent, it means the fund has outperformed the benchmark index during that year. In case the trend continues for the next three years, the fund is seen to be consistently outperforming the benchmark.
At the same time, during a downturn if the fund fell at a rate slower than that of benchmark index, then also, the fund is seen to be outperforming the index.
On the other hand, when the fund’s performance is poorer than that of the benchmark index, then it is said to be lagging the benchmark. For instance, when the benchmark index rose by 6 percent, whereas the fund rose by only 5.5 percent, then the fund is seen to be a laggard that failed to even match the benchmark, let alone outpace it.
So, benchmark index is an important criterion against which a fund’s performance can be, and should be, measured.