Benchmarks for Other Schemes

A benchmark is a market index or a composite of indices that represents the performance of a particular asset class or market segment. Mutual fund distributors use benchmarks to judge whether a scheme is delivering returns that are in line with, better than, or worse than the broader market it is meant to track.

For the NISM exam, the term is important because many questions ask you to compare a scheme's annualised return with its benchmark, or to identify the correct benchmark for a given scheme type. The regulator, SEBI, mandates that every scheme must disclose its benchmark in the scheme information document (SID) and that the benchmark must be appropriate to the scheme’s investment objective.

In practice, a benchmark helps investors set realistic expectations, assess the skill of the fund manager, and decide whether the expense ratio is justified. Remember that a benchmark is not a guarantee of performance; it is merely a reference point.

• Benchmark = reference index for performance comparison.
• Proper benchmark selection is a compliance requirement.

SEBI categorises mutual fund schemes into several broad families – Equity, Debt, Hybrid, Liquid, and Gilt. Each family has a set of indices that best represent the underlying asset class. For example, equity schemes typically use the Nifty 50 or Sensex, while debt schemes may use the CRISIL Composite Bond Index or the Bloomberg Barclays India Government Bond Index.

Hybrid schemes, which invest in both equity and debt, often adopt a weighted composite benchmark that reflects the proportion of equity and debt in the portfolio. Liquid funds, which invest in very short‑term money market instruments, use the Money Market Index (MMI) as the benchmark. Gilt funds, which hold only government securities, use a gilt‑specific index such as the Nifty Gilt Index.

When answering exam questions, first identify the scheme category, then match it with the appropriate benchmark from the list provided in the NISM syllabus. Forgetting the category‑benchmark mapping is a common source of error.

SEBI’s Mutual Fund Regulations (2016) state that a benchmark must be a transparent, widely recognised index that mirrors the scheme’s investment objective, risk profile and asset allocation. The regulator also requires that the benchmark be reviewed at least once a year, and any change must be communicated to investors through a notice and an amendment to the SID.

For the exam, remember three key criteria: (1) Relevance – the index must represent the same asset class; (2) Transparency – the methodology of the index must be publicly available; (3) Consistency – the benchmark should be used consistently over the performance measurement period.

Failure to comply can lead to regulatory action, and distributors may be penalised for mis‑selling a scheme with an inappropriate benchmark. Hence, the exam often tests both the rule and its practical implication.

The most straightforward metric is the excess return, calculated as the scheme’s total return minus the benchmark’s return over the same period. A positive excess return indicates out‑performance, while a negative value signals under‑performance.

Advanced analysis may involve the tracking error, which measures the standard deviation of the difference between scheme returns and benchmark returns. A low tracking error suggests the fund closely follows its benchmark, which is desirable for index‑linked schemes but may be less important for actively managed funds.

In the NISM exam, you will frequently encounter questions that require you to compute excess return for a given period, or to interpret a tracking error figure. Knowing the formula and its components helps you avoid common pitfalls such as mixing up annualised and cumulative returns.