When you look at a mutual fund’s performance, you
would normally find comparison
of the returns with a ‘benchmark’. In 2012, SEBI mandated all fund houses
to declare a benchmark index which is independent of the fund and is based on its
investment objectives. It helps prospective investors to understand the anticipated
performance and returns of the scheme. Some commonly used benchmark indexes are
BSE SENSEX, NSE Nifty, etc.
While a benchmark declared as a standard against which a fund’s performance
can be gauged, blindly following the comparative performance can be counterproductive.
For all practical purposes, investors are better advised to look at this comparison
along with recent and historical performance of the fund during the bullish and
bearish cycles of the market. A holistic view of the performance of the fund can
help investors take informed decisions.