Understanding benchmarks before investing in mutual funds

• Follow

As a mutual fund investor, you might have come across a phrase like “XYZ equity mutual fund is benchmarked against Nifty 50.” Little do we know the relevance of benchmark as an investor. Benchmarks are a useful comparison tool as the benchmark returns indicate how much your mutual fund has given return against how much it should have given. The market regulator Sebi has made it mandatory for the mutual fund houses to declare a benchmark index. Let’s look at intricacies related to the benchmark:

Understanding the benchmark

To be regarded profitable, your mutual fund schemes should aim to beat the benchmark’s return, and if they do so, they’ll be considered successful. That said, the fund house sets the benchmark index for the plan.

To be regarded profitable, your mutual fund schemes should aim to beat the benchmark’s return, and if they do so, they’ll be considered successful. The fund house sets the benchmark index for the plan.

As a result, the scheme’s returns are measured against this. There are several well-known benchmarks that invest in large-company shares, such as the BSE Sensex and the NSE Nifty. Other benchmarks include the S&P BSE 200, CNX Smallcap, and CNX Midcap.

Fund houses select benchmark indices from several factors, including the sector or theme of an investment, market capitalisation, and other criteria. It’s common for investors to prefer large-size funds, whereas small and mid-cap funds are better suited to more experienced investors and those with higher risk appetites.

If an investor wants to know more about the portfolio and performance of each fund, they may do so by looking at the many benchmarks that are accessible for each of these funds.

Why is it essential for the investors?

-The market’s ups and downs affect the funds. The returns of the XYZ funds will be compared to the Sensex if the XYZ fund is benchmarked to the Sensex. In good times, when the market is doing well and the Sensex is rising, a well-managed fund should be delivering a good return.

-That said, choosing a mutual fund scheme based on whether or not a fund has outperformed its benchmark is not the best way to do it. It is, nonetheless, one of the essential elements to consider before investing in mutual funds. An investor can benefit from looking at the fund’s performance history to discover if it has beaten its benchmark significantly over the past several years or not.