Effective 1 April, the benchmark index for ING Core Equity Fund, ING Dividend Yield Fund, ING Contra Fund and ING Domestic Opportunities Fund will be BSE 200. Earlier, the benchmark index for these schemes was BSE 100. ING Mutual Fund has also changed the benchmark index of ING Tax Saving Fund to BSE 100 from its earlier benchmark of CNX Mid Cap index.
Such instances of fund houses revising benchmark indices are few, but does it make any difference?
The capital market regulator, the Securities and Exchange Board of India (Sebi), mandates that all mutual fund (MF) schemes should choose a benchmark index against which they need to measure its performance as part of their disclosures.
While Sebi has mandated fixed benchmark indices for debt funds, it has given the freedom to MFs to choose their benchmark index that they feel are in line with their objective. On the flip side, you could find a mid-cap fund and a large-cap fund from the same fund house being benchmarked against the same index, say, BSE 200, which is primarily meant for flexi-cap or diversified funds.
While schemes launched in the past three to five years are more focused in terms of their objectives and have, therefore, selected appropriate indices, most of the schemes that were launched a long time ago did not have appropriate benchmarks.
Industry experts claim that investors use the scheme’s peers as a benchmark for the fund’s performance rather than the index.
But that doesn’t absolve a fund house’s responsibility to select appropriate benchmark indices. “A scheme that says it has outperformed the benchmark index by, say, 10% would look much better than a scheme that outperformed its benchmark index by, say, 4%. But if these schemes are of the same type and yet have different indices, the comparison isn’t fair,” says K. Ramanathan, chief investment officer, ING Investment Management (India) Pvt. ltd.
Ramanathan feels it is important to have consistency of benchmarks across the industry. Experts claim that while the importance of benchmark indices is not very high in the Indian markets compared with the international markets, it’s important that schemes are sensitized to their benchmark indices to improve transparency.