How Important is Benchmark while investing in Mutual Funds?
How Important is Benchmark while investing in Mutual Funds?
Whenever somebody invests in mutual funds, he/she should have come across the term ‘benchmark’. But they may not know what the term means and how it impacts one’s invested amount. Let’s discuss it in detail!
What is meant by ‘benchmark’ in case of mutual fund?
A standard against which the performance of a mutual fund scheme is measured is known as Benchmark. Benchmark provides an indicative value of the returns that one should have earned through his/her investment. This can be compared against the rate of investment one has originally earned. All the fund houses declare a benchmark index for every scheme and this was made mandatory by the SEBI in 2012.
It is preferred that the mutual fund’s target should match or exceed its benchmark returns. The Benchmark for a particular investment is generally determined by Mutual Fund Houses. Such a Benchmark is considered as the base standard of that particular mutual fund scheme.
Few of popular benchmarks among mutual fund is as follows:
1. Nifty 100 Total Return Index.
2. Nifty 50 Total Return Index.
3. NIFTY Composite Debt Index
4. CRISIL Medium Term Debt Index
5. CRISIL Hybrid 35+65 Aggressive Index
People investing in mutual funds depend on the fund manager to confide their money to them. The benchmarks help the investors to know and also to understand how effectively their investment amount is being managed overtime in the respective mutual fund.
It is considered that the scheme is performing better if a particular mutual fund scheme gives more returns as compared to the benchmark index.
According to financial experts, if a mutual fund performance has been consistently less than its benchmark over a certain period of time, then the same is said to be underperforming
In actively managed fund, the manager should be more vigorous and to perform much better than the benchmark index.
Importance of Benchmark in Mutual funds:
All investors compare mutual fund scheme’s performance with respective benchmark index. Normal fund houses set a goal to do better than the benchmark index. Whereas, the benchmark provides an opportunity for the investors to make a comparison of their investment to the broader market.
If you want to invest long term and in replica of index, you might consider index mutual funds. These are an approximate replica of the underlying index (benchmark) -allocation per script is on a proportionate basis with that of an index. These are not managed actively.
However, actively managed funds, change their allocation as per market conditions. Hence, they have a tendency to outperform or underperform on a long-term basis. Herein, important of benchmark index is highlighted – investors can compare their portfolios’ funds’ performance with that of a benchmark to decide whether they have to exit or hold the scheme. The same is the case with planning fresh investments. It is suggested to hire a financial specialist for handling your investment portfolio.
How does Benchmark work in Mutual Funds?
Having a benchmark for a mutual fund helps you to understand the type of fund, its potential returns, and the risk associated with the fund. A benchmark in a fund will help you to compare the performance of two different funds in the same category. A benchmark will also help you estimate all the possible returns from a new fund and you will be able to assess your fund’s performance through a benchmark.
Some points which you should keep in mind:
1. Actively managed funds are volatile. Hence, in short term, you might see certain underperformance.
2. Based on the time of investment and your risk profile, the mutual fund category needs to be selected and then look for a scheme.
In order to minimize the effects of volatility on your investments, it is suggested to take the mutual fund sip route.
It is very necessary or important to examine and understand benchmarking of mutual funds. Understanding Benchmark is especially important for those who are doing investments in mutual funds for the first time. MUTUAL FUNDS SIP, is a facility that is offered by mutual funds to investors to invest in a disciplined manner. Mutual Fund SIP facility allows an investor to invest a fixed amount of money at some predefined intervals in the selected mutual fund scheme of the investor and is one of the best options for investment.
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