Mutual fund benchmarks

Mutual Fund benchmarks: What do they tell you?

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Do you know what is the benchmark of the following mutual fund schemes?

If you are wondering what a benchmark is, it is an index against which the fund compares its performance. For example, a mutual fund would say that it is going to benchmark against the BSE Sensex, the bellwether index of 30 most liquid stocks. With the fund management skills, it would do better than the Sensex; means it will deliver better returns than the Sensex.

Every mutual fund scheme chooses its own benchmark.

So, the above funds compare their performance with these benchmarks.

  • Axis Long Term Equity Fund – S&P BSE 200
  • HDFC Prudence Fund – CRISIL Balanced
  • Quantum Long Term Equity Fund – S&P BSE Sensex – Total Return Index
  • DSP BR Micro Cap Fund – S&P BSE Small cap
  • ICICI Pru Focused Bluechip Equity Fund – CNX Nifty
  • Sundaram Select Mid cap Fund – S&P BSE Midcap

Why do all these funds have different benchmarks? Isn’t the Sensex or Nifty good enough? What’s the purpose behind have so many?

Valid questions. What’s the need for so many?

I thought I would look at some data to find out how many such benchmarks exist for various funds. And I was astounded. Just for equity and hybrid funds (not counting international funds, debt funds, etc.), there were 51 benchmarks in use for 341 mutual fund schemes.

The following table summarises the benchmarks and the numbers of funds following them.

Table with Mutual Fund Benchmarks and No. of funds

Mutual Fund Benchmarks
Source: ACE MF

I hope your head doesn’t go spinning looking at this table. 🙂

Let’s make a few observations based on the data in the above table:

  • The above table is based on the data for most, but not all, of the funds and their benchmarks. The equity oriented funds or equity hybrids have been taken into consideration and not debt funds.
  • CNX Nifty Index is the most benchmarked index with 63 funds following it. As you might know, Nifty is a collection of top 50 stocks in terms of market capitalisation on the National Stock Exchange.
  • S&P BSE 200, S&P BSE 100 are the next most followed indices. Both are from the stable of Bombay Stock Exchange in collaboration with Standard & Poor.
  • CNX 500 and CNX Mid cap come in next with 30 and 29 funds benchmarking them respectively.
  • BSE Sensex, a collection of 30 most liquid and traded stocks on the Bombay Stock Exchange, which otherwise is one of the most popular indices in the country and even you might be considering it as a barometer, is not so popular with the mutual funds. 🙂

What do the benchmarks tell us?

Let’s go back to the questions and understand what can the benchmarks tell us?

Several things, actually. When a mutual fund chooses its benchmark, it very subtly points to the kind of stocks it will invest in, the portfolio strategy it will follow and the kind of risk it would be willing to take.

Let’s look at few of these benchmark indices, what do they mean and the expected strategy of the fund.

Mutual fund benchmarks - strategy
Table: Market Indices as benchmarks and investment strategy

So, you see the index that a mutual fund benchmarks itself against can give a lot of insight into its universe and investment strategy. However, it is advisable to study the individual funds factsheet too.

How can this information help you?

#1 When you set out to create a diversified portfolio of mutual funds, one of the drivers of fund selection is diversification across market capitalisations. I guess looking at the benchmark index can help you choose funds that have the relevant exposure to a particular market capitalisation.

Of course, there are specialist funds, which focus on a particular market cap and then there are border funds, which follow a multi cap or a mix market cap strategy.

The former would follow a pure large cap, pure mid cap or pure small cap strategy and have Sensex/Nifty, BSE Mid cap or BSE Small Cap as their benchmarks. The latter would have a CNX 500 or a BSE 500 as their benchmarks. For example, HDFC Equity Fund benchmarks itself against CNX 500.

#2 The next is fund evaluation. The question that you can ask is – Is your fund truly following its benchmark? A fund may say that it is a mid cap fund, but when you look at its portfolio, it might have 40% of the holdings in large caps. Now, I would have serious doubts on the funds, which breaches its benchmark reference.

If I have already had exposure to large caps through another fund and I intended to have a mid cap fund to bolster the portfolio, I would want that fund to chase the mid cap universe.

#3 Continuing with fund evaluation for performance, the other question that can be asked is has the fund been able to do better than the benchmark? Would you have been better off investing in just the index fund and not take risk of active fund management?

Now, as far as India is concerned, most of the mutual funds comfortably beat their respective benchmarks in terms of returns. Yet, it helps to know by how much margin the outperformance has been done. If the margin is very low, then you should reconsider if the fund continues to be the right investment for your portfolio.

So, today we looked at a factor, which is rarely given attention to in mutual fund evaluation. The reason is that you as an investor are only concerned if the fund did better than the others. From a benchmark index point of view, as long as it beats the bellwether indices like Sensex or Nifty, you hardly care more. Do you?

Why don’t you try for yourself? Find out the benchmark of your mutual fund schemes. How is your fund doing? Is the investment strategy in line with the benchmark?

Between you and me: Would you use the benchmark as one of the filters for selecting a mutual fund? Let’s take the discussion forward in the comments section.

19 thoughts on “Mutual Fund benchmarks: What do they tell you?”

  1. Sir,
    I am investing in following mutual fund through SIP.
    1. Birla Sun Life Frontline Equity 2k
    2. ICICI Pur value discovery fund- 2k
    3. ICICI Banking and finance fund 2k
    4. Mirae Assest Emerging blue chip 2k
    5. DSP bR Micro cap fund 1500
    6. Reliance Tax Saver Fund- 1500

    How is the portfolio for long time investment 10 yr. Do it require any alteration?

  2. Thanks Vipin for the beautiful article which i happen to read today.
    I am a regular reader of Value Research & invests according to its ratings. I have diversified my Portfolio into Large Cap, Multi Cap & others. But when i check the bench mark of these mutual funds Some Multi Cap follow S& P 100 other S& P 200 , some S&P 500 index . Similar is the scenario with Large Cap funds. Comparing returns of one fund with other within same category of Large Cap or Multi Cap is very difficult.
    My question is, should we diversify on the basis of Large Cap, Mid Cap, Small cap etc or on the basis of bench mark index like Sensex, S&P 100, S&P 200 etc.
    Regards

    • Thank you for reading and the comment Amit.

      To answer your question, the diversification has to happen on the basis of Large, Mid and Small. The benchmark information is helpful in assessing what kind of investing strategy the fund is likely to follow. A BSE 100 benchmarked fund is likely to remain more in large caps but a BSE 500 benchmarked is going to be a better multicap fund, since it can actually move across the market.
      Though nothing is written in black and white, it acts as an indicator, not to be read in isolation.

      Hope this helps.
      Regards
      Vipin

  3. My goal is to invest in the entire market rather than subsets of it (whether by market cap, sector or theme). Does it mean that I should pick only funds that track the CNX or BSE 500?

    • That is one way of looking at it. To pick a fund that has a broader general mandate. The other way is to choose 4 to 5 funds that cover the various market caps and investing styles. The benefit of the latter could be that you can choose the specialists. A franklin bluechip (Benchmark: Nifty 50) for example is a large cap specialist. A Sundaram select mid cap (benchmark: MidCap index) is a mid cap specialist. A dsp micro cap is a small/micro (benchmark: small cap index) cap specialist.

      On the other hand, a ICICI value discovery or a HDFC Equity would be the jack of all with broader mandates having Nifty 500 or BSE 500 as their guiding benchmarks.

      • Thanks your post and reply.

        Do the specialists perform better? That is, does it give me better returns to pick a large- and a mid-cap fund (say) than picking two flexicap funds? If not, I’ll go with the latter.

        The advantage of the latter is that if one fund performs poorly and I decide to exit it, my asset allocation between large and mid caps is still maintained. So, it seems less of a hassle to invest only in flexicap funds. Provided, of course, they perform just as well.

        • The things with flexicap is that the fund manager decides which market caps he wants to be in. For a no fuss investor, that could just be the strategy – hand over the money to the fund and let it do its best. For others, they would want to take a call on the market caps proportions in their portfolio and decide which specialist fund managers to give money to deliver the best possible results without taking undue risk.

  4. Yes exactly, I agree, and that is why we have chosen MF instead of stocks directly….

    The purpose behind the query was just to find out the reason behind it since many bloggers insists to study the market before paying each installment in MF, and my guess was, study the MF before selection and then let it run for a year before review.

  5. I think there is a confusion as to benchmark and investment strategy. A fund will have a benchmark which will broadly reflect its purpose and of course to be used as “performance parameter” or rather “relative performance parameter”.
    Fund’s investment strategy decides whether you want to take 100% exposure in mid-cap or small-cap fund for a mid cap and small cap fund respectively or you want to have risk mitigation strategy and therefore would like to invest some part of your AUM in large-cap, etc.
    HDFC Equity is a multi-cap fund and therefore rightly have a benchmark of CNX 500. Nothing wrong in that.
    Relative performance against the benchmark and of course absolute performance is the key to fund selection.

  6. Superb one Vipin!

    BTW, any pointer on how to compare the fund performance against its benchmark ? Using Valueresearchonline portal? Also, how to know if my fund has invested in large cap companies instead of midcap one where it should have? in other words, how to know which company falls under small cap, midcap or large cap category so that I can compare it with fund holdings?

    • Thank you Umesh! Most online sites which have mutual fund listing give you that comparison. You can also look for the same at the individual fund house’s website or in its factsheet too.

      To know if a company is large, mid or small cap, you can use bseindia.com or nseindia.com websites. Though a site like valueresearch also gives that breakup, i think so.

      Hope this helps. Vipin

      • Thanks, also, suppose I have a mutual fund A whose benchmark is let’s say BSE 100. So suppose in a given day, if I observe a sharp decline in BSE 100 during a trading day by more than 200 points, does it mean, MFs having this benchmark will also book a loss and will have lower NAVs for that day?
        This question is in context of monthly manual investment in a particular fund, can we assume if that benchmarks falls below certain points means for that day NAV will also on lower side?

        • Umesh, the answer is may be or may not. It depends on the specific stocks and their weightage in the fund portfolio. For example, if you notice Sensex. there are days, when the Sensex overall is down but some stocks gain and some lose value. And vice versa.

          • Ok, so it means even though one decides to time the market, he won’t be able to unless he has all the holding details/weight per MF and then he may think to invest if he see the corresponding stocks value has been dropped. Am I right?

          • Umesh, I have no clue on market timing. As far as the mutual fund is concerned, the whole idea of investing in a mutual fund is to do away with taking a daily view of the markets and individual stocks and businesses and valuations and let the fund manager to that job for you.

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