Updated on March 6, 2023
The performance of any investment is evaluated against a parameter or with a standard known as a ‘benchmark’. The benchmark for a mutual fund is an ‘Index’ which is decided at the time of an NFO or New Fund Offer. The selection of a benchmark depends on the investment objective, the strategy of the scheme, market capitalisation or the theme, along with certain other parameters. Mutual funds are required to declare their benchmarks in their scheme information document. Investors can check the performance of their investment by comparing its returns against the benchmark. Examples of mutual fund benchmarks are: Nifty 50, BSE Sensex, Nifty 500, BSE 200 etc.
How to measure mutual fund performance against Benchmark?
A fund’s performance is measured against its benchmark by using certain ratios which evaluate the fund’s returns in comparison with the Index it is benchmarked with. Some of the parameters or measures are – Alpha, Beta and R-squared.
Why is it important to measure mutual fund performance against Benchmark?
Some of the reasons why comparing mutual fund performance against benchmark is important:
1. Benchmark helps in identifying outperformaing/underperforming funds
2. It helps in understanding the risk associated with a fund against the Index as well as against other funds in the same categories or across categories.
3. Benchmark assists investors in deciding their asset allocation across funds.