SEBI changes mutual funds’ benchmarking norms. All you need to know

The market regulator Securities and Exchange Board of India (SEBI) recently announced plans to change the benchmarking norms for mutual fund schemes in a bid to facilitate uniformity. The regulator, in a circular, said there would be a two-tiered structure for benchmarking of mutual fund schemes.

The benchmarks followed by fund schemes would mandatorily be Total Return Index (TRI).

Two-tier benchmarking

As per the SEBI’s circular, the first-tier benchmark would reflect the scheme's category and the second-tier benchmark would demonstrate investment style or fund manager's strategy within the given category.

In case of income and debt-led schemes, the first-tier benchmark would be a broad market index for each category such as Nifty Ultra Short Duration Debt Index (or Crisil Ultra Short-Term Debt Index) if it falls under Ultra Short Duration Fund Category.

The second tier would vary depending on the investment style or index strategy such as AAA bond index.

The SEBI circular says the second-tier benchmark is optional and shall be decided by the asset management company according to investment style.

Easier to compare

The experts believe that this new move will make the comparison between different mutual fund schemes simpler. Benchmark is an index that is used to evaluate the mutual fund scheme's performance.

It gives an indication of the potential return on investment. Usually, the unwritten code of any mutual fund scheme is to beat the benchmark.

For the schemes that fall in the category of hybrid and solution-oriented schemes, thematic, sectoral schemes, index funds and ETFs, there would only be a single benchmark.

The market regulator told the Association of Mutual Funds in India (AMFI) to publish benchmarks that will be used as first-tier benchmarks by AMCs (asset management companies), and they would be applicable from December 1, 2021.

In summary, we can highlight that the mutual fund schemes would now need to mention a two-tier benchmarking index, the first indicating the category of fund and the second for investment strategy.