How does a mutual fund select its benchmark? Is it allowed to change its benchmark mid-way and under what conditions? I want to understand if it is in the interest of funds to select poor benchmarks and thus claim extraordinary performance by beating them consistently.
- Bharat Pandey
It is mandatory for all funds to select a benchmark based on the investment objective and portfolio. The role of the benchmark is to provide a context for the performance of the fund, as you cannot say how well a fund has performed without also looking at how the market performed during the same period. The benchmark's role is to represent the market and help an investor in his evaluation of the fund. In India, the BSE Sensex and the Nifty are the most widely followed benchmarks for large-cap funds. Other benchmarks are CNX Midcap, CNX Smallcap, CNX IT, CNX 500, BSE 200, BSE 100, etc.
Mutual funds have the freedom to change the benchmark if they feel that it doesn't represent their investment universe and strategy.
There have been criticism that funds are opting for the easy way out while choosing a benchmark. Here is a column from our archive, which deals with the topic: Are fund benchmarks flawed?
This article was originally published on February 17, 2016.
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