8.

4 Benchmarks and Performance

8.4.1 Benchmarks

Mutual fund schemes invest in the market for the benefit of Unit-holders. How well did a scheme perform?
An approach to assess the performance is to pre-define a comparable – a benchmark – against which the
scheme can be compared.

 A credible benchmark should meet the following requirements: It should be in sync with (a) the
investment objective of the scheme (i.e. the securities or variables that go into the calculation of the
benchmark should be representative of the kind of portfolio implicit in the scheme’s investment
objective); (b) asset allocation pattern; and (c) investment strategy of the scheme.

 The benchmark should be calculated by an independent agency in a transparent manner, and published
regularly. Most benchmarks are constructed by stock exchanges, credit rating agencies, securities
research houses or financial publications.

Choice of benchmark is simplest for an index fund. The investment objective is clear on the index that the
scheme would mirror. That index would then be the benchmark for the scheme.

For other schemes, choice of benchmark is subjective. The benchmark for a scheme is decided by the AMC
in consultation with the trustees. Offer document of the scheme has to mention the benchmark. Further,
along with the past performance of the scheme, the performance of the benchmark during the same period
has to be mentioned.

At a later date, the fund may choose to change the benchmark. This could be for various reasons. For
instance, the investment objective of the scheme may change, or the construction of the index may change,
or a better index may become available in the market. AMCs can change the benchmark in consultation with
the trustees. Further, the change needs to be justified and documented.

Mutual fund schemes are required to disclose the name(s) of benchmark index/indices with which the AMCs
and trustees would compare the performance of the scheme.

Earlier, the Mutual Fund schemes were benchmarked to the Price Return variant of an Index (PRI). PRI only
captures capital gains of the index constituents.

With effect from February 1, 2018, the mutual fund schemes are benchmarked to the Total Return variant of
an Index (TRI). The Total Return variant of an index takes into account all dividends/ interest payments that
are generated from the basket of constituents that make up the index in addition to the capital gains. 13

8.4.2 Benchmarks for equity schemes

The following aspects of the investment objective (scheme type, choice of investment universe, portfolio
concentration, underlying exposure) drive the choice of benchmark in equity schemes:

Scheme Type

A sector fund would invest in only the concerned sector; while diversified funds invest in all sectors.
Therefore, diversified funds need to have a diversified index as a benchmark index, like S&P BSE Sensex or
Nifty 50 or S&P BSE 200 or S&P BSE 500 or Nifty 100 or Nifty 500 as a benchmark; sectoral
/ thematic funds select sectoral / thematic indices such as S&P BSE Bankex, S&P BSE FMCG Index, Nifty
Infrastructure Index and Nifty Energy Index.

Choice of Investment Universe

Some diversified equity funds invest in large companies; while there are others that focus on mid- cap stocks
or small cap stocks. S&P BSE Sensex and Nifty 50 indices are calculated based on 30 (in the case of Sensex) /
50 (in the case of Nifty) large companies. Thus, these indices are appropriate benchmarks for diversified
equity funds that invest in large companies. For a diversified equity fund that have mid-cap stocks as its
investment universe, mid cap indices such as Nifty Midcap 50 or S&P BSE Midcap are considered as better
benchmarks.

Choice of Portfolio Concentration

Some diversified equity funds prefer to have fewer stocks in their portfolio. For such schemes, appropriate
benchmarks are narrow indices such as S&P BSE Sensex and Nifty 50, which are calculated based on fewer
stocks. Schemes that propose to invest in more number of companies will prefer broader indices like S&P
BSE 100 / Nifty 100 (based on 100 stocks), S&P BSE 200 / Nifty 200 (based on 200 stocks) and S&P BSE 500 /
Nifty 500 (based on 500 stocks).

8.4.3 Benchmarks for Debt Schemes

As per the SEBI guidelines, the benchmark for debt (and balanced schemes) should be developed by research
and rating agencies recommended by AMFI. CRISIL, ICICI Securities and NSE have developed various such
indices.

NSE’s MIBOR (Mumbai Inter-Bank Offered Rate) is based on short term money market. NSE similarly has
indices for the Government Securities Market. These are available for different variations such as Nifty
composite G-sec index, Nifty 4-8 Year G-sec index, Nifty 10 year benchmark G-sec index etc.. BSE also has
certain indices for Government securities such as the S&P BSE India Sovereign Bond Index, S&P BSE India
Government Bill Index etc.

ICICI Securities’ Sovereign Bond Index (I-Bex) is again calculated based on government securities. It consists
of an umbrella index covering the entire market, and sub-indices catering to three contiguous maturity
buckets. The three sub-indices are:

o Si-Bex (1 to 3 years),

o Mi-Bex (3 to 7 years) and

o Li-Bex (more than 7 years)

CRISIL has a set of indices for debt schemes.

SEBI Category CRISIL Index

Overnight Fund CRISIL CBLO Index

Liquid Fund CRISIL Liquid Fund Index

Ultra Short Term Fund CRISIL Ultra Short Term Debt Index

Money Market Fund CRISIL Money Market Index

Low Duration Fund CRISIL Low Duration Debt Index (Renamed from
existing CRISIL Ultra Short Term Debt Index)

Short Duration Fund CRISIL Short Term Bond Fund Index

Medium Duration Fund CRISIL Medium Term Debt Index

Medium to Long Duration Fund CRISIL Medium to Long Term Debt Index

Long Duration Fund CRISIL Long Term Debt Index

Dynamic Bond CRISIL Composite Bond Fund Index

Corporate Bond Fund CRISIL Short Term Corporate Bond Index, CRISIL
Medium Term Corporate Bond Index, CRISIL Long
Term Corporate Bond Index, CRISIL Corporate Bond
Composite Index
 SEBI Category CRISIL Index

Credit Risk Fund CRISIL Credit Risk Index

The following aspects of the investment objective (scheme types, choice of investment universe) drive the
choice of benchmark in debt schemes:

Scheme Type

Liquid schemes invest in securities of upto 91 days maturity. Therefore, a short term money market
benchmark like NSE’s MIBOR or CRISIL Liquid Fund Index is suitable.

Non-liquid schemes can use one of the other indices mentioned above, depending on the nature of their
portfolio.

Choice of Investment Universe

Gilt funds invest only in Government securities. Therefore, indices based on Government Securities are
appropriate. Debt funds that invest in a wide range of Government and Non-Government securities need to
choose benchmarks that are calculated based on a diverse mix of debt securities. In the absence of a vibrant
market for Non-Government securities, related indices are not so widely available.