Mutual Fund Unlocked: What is a benchmark?

While investing into mutual funds many a times you notice the word benchmark. But do we know what a benchmark is? Let's understand more about benchmark.

A benchmark is a set standard against which the performance of the investment, that is, performance of the security, mutual fund can be measured. The market regulator SEBI has made it manadatory for all fund houses to disclose benchmark index for all the schemes. The benchmark for each scheme differs as per the investment objective of the scheme. For example, usually large-cap funds may set NIFTY or Sensex as their benchmark.

A benchmark is used in two ways. First, it is referred as a standard to which funds performance is measured. Benchmark gives a sense to the returns earned by the fund. If the fund beats the benchmark consistently, then the fund and the fund's management are considered as consistent performers as the funds performance will come from its stock selection and the sectoral weightage which is relative to its benchmark. So benchmark is considered as the performance measuring tool for the mutual funds.

Secondly, the benchmark is useful in determining the investment arena of the fund. That is the benchmark gives an idea about how and where the fund will invest possibly or what kind of portfolio it will construct.

Therefore benchmark is one of the most important aspects for an investor and one should make sure to look at the benchmark before investing into the fund.