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Performance tracking: New benchmark norms for mutual funds

The first tier benchmark will reflect the scheme category and the second tier benchmark will reflect the investment strategy of the fund manager within the category

The markets regulator’s circular is to standardise and bring uniformity in the benchmarks of mutual fund schemes after taking into account the recommendations of the Mutual Fund Advisory Committee.
The markets regulator’s circular is to standardise and bring uniformity in the benchmarks of mutual fund schemes after taking into account the recommendations of the Mutual Fund Advisory Committee.
In order to make it easier for individual investors to compare and invest in mutual fund schemes, Association of Mutual Funds in India (Amfi) has specified the indices to be followed by the asset management companies (AMCs) as tier one benchmark. This follows a circular from Securities and Exchange Board of India (Sebi) for a two-tiered structure for benchmarking various categories of mutual fund schemes.

The first tier benchmark will reflect the category of the scheme and the second tier benchmark will reflect the investment strategy of the fund manager within the category. All the benchmarks followed will necessarily be Total Return Indices (TRI). The markets regulator’s circular is to standardise and bring uniformity in the benchmarks of mutual fund schemes after taking into account the recommendations of the Mutual Fund Advisory Committee.

The new benchmarking guidelines applicable from January 1 will be for debt-oriented, equity-oriented, hybrid and solution, thematic, index funds and exchange-traded funds (ETFs) and Fund of Funds Schemes (FoFs). While Amfi has specified the Tier 1 benchmark as specified by Sebi, the second-tier benchmark is optional and will be finalised by the mutual fund companies depending on the investment strategy/style of a particular scheme.

As mutual funds invest in the same universe of stocks, a common benchmark will help investors to make an informed decision. Analysts say the common tier one benchmark will help investors understand the performance of schemes within a particular category, compare them with the benchmark and invest in the funds most suitable to them.

Benchmark for equity funds
For equity-related funds, fund houses will have to select from the NSE or S&P BSE indices. For multi-cap funds, fund houses can select Nifty 500 Multi-cap 50:25:25 or S&P BSE 500 TRI for first-tier benchmark. The large-cap scheme will have to select between Nifty 100 and S&P BSE 100. Mid-cap funds will have to benchmark either with Nifty Mid-cap 150 or S&P BSE Mid-cap 150 TRI for the first-tier benchmark. Small-cap funds will have to select between Nifty small-cap 250 or S&P BSE 250 small-cap TRI. For equity-linked savings schemes, the benchmark will either be Nifty 500 or S&P BSE 500 TRI. Similarly, for flexi-cap funds it will either be Nifty 500 or S&P BSE 500 TRI.

Benchmark for debt funds
In debt-oriented funds, the schemes will have to select benchmark from the NSE, S&P BSE, or CRISIL indices. For all liquid funds, fund houses will have to benchmark them (Tier 1) to one of the three—Nifty Liquid Index, S&P BSE Liquid Rate TRI, Crisil Liquid Fund Index. For ultra- short duration funds, the benchmark will be Nifty Ultra Short Duration Debt Index or Crisil Ultra Short Term Debt Index. In Tier 1, for money market funds, the benchmark will be either Nifty Money Market Index or Crisil Money Market Index.

Benchmark for hybrid funds
In hybrid funds for first-tier benchmark, the conservative hybrid index funds will be benchmarked to Nifty 50 Hybrid Composite Debt 15:85 Index or Crisil Hybrid 85+15 Conservative Index. All balanced funds will either be benchmarked to Nifty 50 Hybrid Composite Debt 50:50 or Crisil Hybrid 50+50 Moderate Index.

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