What is it?
According to the Securities and Exchange Board of India, Indian mutual funds need to measure the performance of their schemes against an index. This is done to enable investors to judge their scheme’s performance and compare it with another instrument (in this case, an index) to ascertain whether it’s meeting their financial goals.
Why is it important?
Is a 50% return good or bad? Growth sounds good, but what’s the big deal if others have grown more? Here’s where a benchmark index comes in. If your benchmark returns 60%, your fund is said to have underperformed at 50%. If such underperformance is a consistent feature, you should consider an exit.
Which index to look at?
Equity funds are free to choose the benchmark index they feel consists an appropriate universe of stocks that the it aims to invest in. But, debt funds are mandated to use specific indices. Crisil Ltd, India’s leading credit rating agency, and ICICI Securities Ltd create these indices and maintain them. Look out for your scheme’s performance against the index in your fund’s monthly fact sheet.
What’s the catch?
Since equity funds are free to choose their index, it is possible that similar funds have different indices. Two large-cap funds, for instance, may be benchmarked against Nifty and BSE 100, respectively. It’s always better to also compare your fund’s performance with the average performance of the category that your fund belongs to.