I have two questions. First, when we say that government-backed gilt funds are ultra-safe, then why isn't our sovereign rating highest? And is it possible to standardise the benchmarks in mutual funds, given the fact even after SEBI has standardised the categorisation of mutual funds, funds within the same category use different benchmarks for comparison?
- Raghu
Sovereign rating is not the highest, as this rating is mainly for foreign investors. So, India may not have the highest rating for foreign investors. However, for Indians, sovereign borrowing is the safest. If you think that the Government of India can default on the repayment of your principal and interest, then it's a thing to worry about. Also, domestic sovereign bonds are not rated, as they are considered to be ultra-safe.
Having said that, this doesn't necessarily mean that you won't lose money by investing in gilt funds or you aren't exposed to risk, as there are several aspects to it, apart from the creditworthiness. One of them is interest-rate risk where the value of bond fluctuates with the rise and fall in interest rates.
Coming to your second question, ideally, there should be benchmark standardisation. However, SEBI's classification of all equity and all fixed-income funds is a fairly broad range. If you look at the definition of the large-cap or multi-cap category, a fund manager is likely to follow a strategy for which, there can be several suitable benchmarks.
For instance, a multi-cap category can have a benchmark like BSE 200 or BSE 500. Both are appropriate, as both will give you exposure across large- mid- and small-cap categories. In fact, for large- and mid-cap categories, BSE 100, as well as BSE 200, can be used as a benchmark. On the other hand, for the large-cap category, both BSE 100, Sensex or Nifty can be the appropriate benchmark. Although ideally it should be standardised, the fund manager chooses the most appropriate benchmark based on his/her strategy.
I would also like to add that these kinds of refinements won't bring about a huge difference to the performance of the funds, as the benchmark is just a reference point.
This article was originally published on August 01, 2019.
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