Of Relative Performance

Do you remember the exam system in school and college where you had to score a minimum of 35 to pass an examination? The more you got, the more intelligent you were. The passing mark—whether it is 35 per cent or 40 per cent—is the benchmark that a student has to cross. Fund managers too have such a test to pass. Take the case of a fund manager who generated a return of negative 16 per cent in the past three months and was happy with his performance. Before you begin to doubt his intelligence or run to withdraw your money from his fund, please understand that the fund manager has a reason to be satisfied—he surpassed his benchmark. Let us now understand what benchmarking means and see why it can make your investments look better, or wor

This article was originally published on April 26, 2003.