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A benchmark is an index against which a mutual fund’s performance is measured. For example, the Nifty 50 is a benchmark against which many large-cap funds and index funds are measured. From February 1, 2018, Securities and Exchange Board of India (SEBI) mandated that all benchmarks should be shifted from the Price Index to the Total Returns Index (TRI). A Total Returns Index takes dividends into account and hence, is considered more accurate than a price index. Note that a benchmark should only be used to evaluate a fund by comparing its returns over the long term. For example, a 6-month performance against the benchmark in an equity fund holds little value in comparison with a 3-year performance.
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Example of Benchmark Comparison:
Given below is a table that shows how a fund’s returns along with its benchmark. Axis Long Term Equity Fund, one of India’s most popular ELSS funds has clearly outperformed its benchmark (Nifty 200 TRI) over the past 3 years (3-year return is more than its benchmark) but underperformed over the past 5 years (5-year return is lesser than its benchmark).
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| Fund/Benchmark | 3-year returns | 5-year returns |
| Axis Long Term Equity Fund | 11.16% | 11.93% |
| Nifty 200 TRI (Benchmark) | 8.58% | 8.07% |
Source: Value Research, Data as on Oct 20, 2019
Common Benchmarks Used for Different Fund Types
The following benchmarks are commonly used for different fund categories:
| Benchmark | Focus | Fund Category |
| Nifty 50 TRI | Top 50 stocks by market cap | Large-cap |
| BSE Sensex TRI | Top 30 stocks by market cap | Large-cap |
| Nifty 200 TRI | Top 200 stocks by market cap | Large and Mid-cap |
| BSE 200 TRI | Top 200 stocks by market cap | Large and Mid-cap |
| Nifty Midcap 250 | Top 250 midcap stocks | Mid-cap |
| Nifty Smallcap 250 | Top 250 smallcap stocks | Small-cap |
| Crisil Composite Bond Index | Dynamic Bond Fund | |
| Crisil Short Term Bond Index | Short Term Bond Fund |
Benefits of Benchmarks
- You can compare a benchmark return with the return of a mutual fund to evaluate its performance.
- You can use a benchmark to compare between two different funds that fall in the same category. For example, if Fund A outperforms the benchmark by 3%, and Fund B outperforms by 6%, it will be easier for you to decide which fund to invest in.
- You can use a benchmark to evaluate the possible performance of a fund that is about to be launched. Such funds have no past history or track record. However, the benchmark chosen can give you a rough idea of the kind of rights you will get.
Which Benchmark to Use?
Mutual Funds are required to declare their own benchmarks in their filing documents (called SID or Scheme Information Document). In most cases, SID becomes the benchmark of the fund and is reported on mutual fund and third-party websites. For example, HDFC Top 100 Fund, a large-cap equity fund uses the Nifty 100 TRI as its benchmark while HDFC Equity Fund, a multi-cap fund uses the Nifty 500 TRI as its benchmark. However, sometimes, the selected benchmark may not be completely appropriate and may flatter the performance of a fund. For example, Kotak Standard Multicap Fund uses Nifty 200 as its benchmark rather than Nifty 500, despite being able to buy companies other than the top 200 companies listed on stock exchanges.
How to Overcome the Problem of an Inappropriate Benchmark?
When the benchmark selected by a fund is inappropriate, the investor should compare the fund with its category average performance rather than its benchmark performance. A category average will include all the funds in a particular category- such as all mid-cap funds or all small-cap funds. These funds are required to adhere to the same rules as the fund in question and hence they can be easily compared with that fund.
For example, all large-cap funds are required to invest 80-100% of their assets in large-cap stocks (defined as the top 100 stocks by market capitalization). Some of these funds may choose Nifty 50 as a benchmark and others may choose Nifty 100. However, you can overcome this divergence by simply comparing each individual fund against the average returns of all funds in the large-cap category, regardless of which benchmark they have chosen.
The second solution to a mutual fund choosing an inappropriate benchmark is that the investor should assign his or her own benchmark to the fund and measure the fund against that benchmark. This is usually done by expert research institutions like Value Research and Morningstar. You will often see their benchmarks diverging from the ones chosen by the fund house. This is because they have taken an active decision to substitute the declared benchmark with an alternative benchmark.
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Frequently Asked Questions
Q. What is the significance of a mutual fund benchmark?
A. Every mutual fund scheme has a corresponding benchmark, which is used to contextualize the returns of the mutual funds, by comparing them with the benchmark returns to judge its performance against the broader market.
Q. Why is it important to compare a scheme’s performance with that of its benchmark?
A. Comparing a fund’s performance with the benchmark tells us whether the fund has outperformed the market or not, across a range of time periods. It aids in choosing a suitable mutual fund scheme for investment.
Q. What is benchmark error?
A. It refers to a situation where a wrong benchmark is picked in a financial model. This can lead to large dispersions, and incorrect judgement of performance of the mutual fund.
Here is a List of Mutual Funds to Invest in 2020
| Scheme Name | 3Y Return | 5Y Return | AUM (CR) |
| Axis Bluechip Fund – Direct Plan | 21% | 11% | 8749 |
| Mirae Asset Tax Saver Fund – Direct Plan | 20% | – | 2671 |
| Axis Midcap Fund – Direct Plan | 19% | 12% | 3551 |
| Axis Bluechip Fund – Growth | 19% | 10% | 8749 |
| Mirae Asset Tax Saver Fund – Regular Plan | 18% | – | 2671 |
| Mirae Asset Emerging Bluechip Fund – Direct Plan | 18% | 17% | 8868 |
| Axis Long Term Equity Fund – Direct Plan | 18% | 12% | 21492 |
| Invesco India Growth Opportunities Fund – Direct Plan | 18% | 12% | 1991 |
| Axis Midcap Fund – Growth | 18% | 10% | 3551 |
| Mirae Asset Emerging Bluechip Fund – Growth | 17% | 16% | 8868 |
| Kotak India EQ Contra Fund – Direct Plan | 17% | 11% | 874 |
| Canara Robeco Bluechip Equity Fund – Direct Plan | 17% | 10% | 257 |
| Axis Small Cap Fund – Direct Plan | 16% | 13% | 1200 |
| IIFL Focused Equity Fund – Direct Plan | 16% | 12% | 446 |
| JM Multicap Fund – Direct Plan | 16% | 11% | 143 |
| Axis Long Term Equity Fund – Growth | 16% | 11% | 21492 |
| JM Tax Gain Fund – Direct Plan | 16% | 11% | 35 |
| Invesco India Growth Opportunities Fund – Growth | 16% | 10% | 1991 |
| Canara Robeco Bluechip Equity Fund – Regular Plan | 16% | 9% | 257 |
| Canara Robeco Equity Diversified – Direct Plan | 16% | 9% | 1581 |