SEBI’s double-benchmark system for mutual funds – All You Should Know

  • Marisha Bhatt
  • 01 Aug
  • 5 minutes

Market regulators and governing bodies are increasingly tightening the noose around mutual fund houses to ensure maximum investor protection. Along similar lines, to make mutual fund investments easy to invest and comparable for individual investors, the Association of Mutual Funds in India (AMFI) recently came out with a list of indices to be followed by schemes as tier one benchmark. This step is in line with the circular from the Securities and Exchange Board of India (SEBI) requiring a two-tiered benchmarking structure across different mutual fund categories.

Here is all the information that investors need to know about new mutual fund benchmarks.

Two-tier benchmark structure for mutual funds

After considering the recommendations of the Mutual Fund Advisory Committee, SEBI announced new benchmarking guidelines for mutual fund schemes effective from January 1.

These cover debt, equity, hybrid, thematic, solution, index funds, exchange-traded funds (ETFs) and Fund of Funds Schemes (FoFs). Accordingly, AMFI too has released the Tier 1 benchmark, while Tier 2 benchmark will be optional. The Tier 2 benchmark must be finalised by the AMCs as per the investment strategy of the scheme or its style. All mutual fund benchmarks will mandatorily have to be Total Return Indices (TRI).

The Tier 1 benchmark will indicate the scheme’s category, and the Tier 2 benchmark will indicate its specific investment strategy. The markets regulator’s intent behind circulating a standardised approach in benchmarks is to bring uniformity across mutual fund schemes. 

Tier 1 benchmark for equity schemes

AMCs offering equity-related funds can select benchmarks from the NSE or S&P BSE indices. Here is the list of generally offered equity schemes and the Tier 1 benchmarks that fund houses can select for each:

  • For multi-cap funds – Nifty 500 Multi-cap 50:25:25 or S&P BSE 500 TRI 
  • large-cap scheme – Nifty 100 and S&P BSE 100. 
  • Mid-cap funds – Nifty Mid-cap 150 or S&P BSE Mid-cap 150 TRI 
  • Small-cap funds – Nifty small-cap 250 or S&P BSE 250 small-cap TRI. 
  • For equity-linked savings schemes – Nifty 500 or S&P BSE 500 TRI. 
  • Flexi-cap funds – Nifty 500 or S&P BSE 500 TRI

Tier 1 benchmark for debt schemes

In general, AMC’s offering debt-oriented funds can select Tier 1 benchmark from the NSE, S&P BSE, or CRISIL indices. Here is the list of debt schemes and benchmarks that can be selected for each:

  • For all liquid funds – Nifty Liquid Index, S&P BSE Liquid Rate TRI, or Crisil Liquid Fund Index. 
  • For ultra-short duration funds – Nifty Ultra Short Duration Debt Index or Crisil Ultra Short Term Debt Index. 
  • Money market funds – Nifty Money Market Index or Crisil Money Market Index.

Tier 1 benchmark for hybrid schemes

In hybrid fund schemes, here are the Tier 1 benchmarks to be followed: 

  • Conservative hybrid index funds – Nifty 50 Hybrid Composite Debt 15:85 Index or Crisil Hybrid 85+15 Conservative Index. 
  • Balanced funds – Nifty 50 Hybrid Composite Debt 50:50 or Crisil Hybrid 50+50 Moderate Index.

Purpose of common Tier-1 benchmark for mutual funds?

With a common Tier-1 benchmark/benchmarks for each mutual fund category, investors will be able to easily check a scheme’s relative performance against others within a fund category that follows the same benchmark. This is because the Tier-1 benchmark will represent the broader investment universe for a mutual fund category.

Mutual fund houses will also be able to benchmark their schemes against a Tier-2 benchmark that can represent the scheme’s investment style. It can thereby guide investors in identifying the fund’s unique investment style and also compare the fund’s performance against the benchmark.

With the introduction of the Tier-1 benchmarks to be followed by mutual funds, even a new fund offering can be easily tracked by investors against the benchmark.

Conclusion

Since mutual fund schemes invest within a common universe of securities, introducing a common benchmark will help investors in making informed investment decisions. According to analysts, a common Tier 1 benchmark will help investors in studying the scheme’s performance within a given category. It will also let them compare schemes within the benchmark and accordingly invest in schemes that are ideal for their investment preference and goals.

FAQs

Do actively managed mutual funds follow a benchmark index?

Actively managed funds were not necessarily following a benchmark index for the structuring of the portfolio or measuring performance. However, as per SEBI and AMFI mandates, the fund houses will now be required to have a Tier-1 benchmark against each scheme so that investors can track and compare its performance.

Why is benchmarking needed in mutual funds?

Benchmarking of mutual fund schemes against an indice is essential since mutual funds mostly invest in securities such as stocks, bonds, etc. that are commonly traded on stock exchanges. The benchmark indices help investors and fund houses gauge the scheme’s performance against the index.

How can investors measure a mutual fund’s performance?

Investors can track and measure a mutual fund’s performance by looking at its benchmark index performance and also comparing it against peer schemes that have the same investment strategy.

How to select the best mutual fund scheme?

To select the right mutual fund scheme, one can look at factors like investment objective, financial goals, investment horizon, and risk-return expectations, apart from the scheme’s historical performance and performance against the benchmark.

How to invest in mutual funds?

To invest in mutual funds, investors can download the Finity app on their smartphone. The app has a wide range of scheme options that can be selected based on risk, return, and timeline preferences.

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Marisha Bhatt