Benchmark

Investments

A benchmark is the index against which a mutual fund's performance is measured. Large-cap funds benchmark against Nifty 50 or Nifty 100. Mid-cap against Nifty Midcap 150. Beating the benchmark after expenses justifies active management fees.

In detail

SEBI mandates that every mutual fund declare a benchmark. A fund that cannot beat its benchmark consistently after fees for 5-10 years should be replaced with a low-cost index fund tracking that benchmark.nnAlpha = Fund return - Benchmark return (adjusted for risk). Consistently negative alpha = fund is destroying value vs simply indexing.

Formula

Benchmark-relative return = Fund return - Benchmark returnnPositive = outperformance (alpha generated)nNegative = underperformance

Real-life example

🇮🇳 India example

HDFC Mid Cap Opportunities Fund: 5-year return 20.8% vs Nifty Midcap 150 TRI benchmark of 22.1%. The fund underperformed its benchmark by 1.3%/year after expenses. Investor would have done better in a Nifty Midcap 150 index fund.

Frequently asked questions

Which index should I use to evaluate my mutual fund? ▼

Use the benchmark declared by the fund in its factsheet (Total Return Index version which includes dividends). Compare 5 and 10-year periods. If fund consistently underperforms benchmark over 7+ years, switch to index fund.