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The Securities and Exchange Board of India (Sebi) has decided to bring in a two-tiered structure for benchmarking of certain categories to standardize benchmarks of mutual fund schemes.

The first-tier benchmark will be according to the category of the scheme. The second-tier should be reflective of the investment style or strategy of the fund manager within the category. Usually, the performance of a mutual fund scheme is assessed with reference to a benchmark, which could be a total return index (TRI) of CNX Nifty or BSE Sensex.

All the benchmarks should follow TRIs, the markets regulator reiterated in a circular issued on Wednesday. TRIs take into account the prices of the stocks and the dividend payout, while the price return index such as Nifty and Sensex are based on the prices of the stocks.

Sebi had in January 2018 asked mutual fund houses to adopt TRI to benchmark schemes.

For first-tier benchmarks of income/debt-oriented and growth/equity-oriented schemes, the regulator has suggested one broad market index per index provider for each category. For the second-tier benchmarks of these two categories, there should be a bespoke benchmark according to the investment style or strategy of the index.

Sebi said that the first-tier benchmark for income/debt-oriented schemes could be, for example, the Nifty Ultra Short Duration Debt Index or the Crisil Ultra Short Term Debt Index for the ultra-short duration fund category.

There would be a single benchmark for thematic/sectoral and exchange-traded fund (ETF) schemes, it said.

“Similar to an index fund and ETFs, if an FoF (fund of the fund) scheme is investing in a single fund, the benchmark of the underlying scheme shall be used for the corresponding FoF. However, in case an FoF scheme invests in multiple schemes, then broad market index shall be applied," Sebi said in a circular.

For hybrid and solution-oriented schemes, there would be a single benchmark. This would be a broad market benchmark wherever available or bespoke to be created for schemes, which would then be applicable across the industry.

For other schemes, a broad market benchmark may be arrived at depending on the underlying asset allocation, the regulator said.

Sebi has also advised the Association of Mutual Funds in India is to publish benchmarks intended to be used by asset management companies as first-tier benchmarks within a month.

Second-tier benchmarks for open-ended debt schemes have to be published by 1 December. The second-tier benchmarks are optional.

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