Executive Summary: Every mutual fund scheme has a benchmark index associated. We can measure the performance of the fund against the benchmark. A mutual fund scheme is said to over perform if the returns are considerably higher than that of the index or in a market downturn has lost less value as compared to the benchmark. It is said to underperform if the returns are equal to or lower than that of the index or in a market downturn or has lost the same or more value as compared to the benchmark.
A benchmark is a standard against which you can measure performance. Mutual fund schemes have to mandatorily specify a benchmark index against which they can be measured. The performance of a mutual fund and the fund manager’s skill is evaluated against the specified index. The benchmark has to be meaningful. It should reflect the fund’s investment philosophy and objective.
It is important to set a benchmark for mutual funds –
- You can get an idea on the investment portfolio of the mutual fund based on the benchmark selected. This will help in your investment decisions.
- You will understand about the risks involved and returns expectations. If a mutual fund has the CNX Midcap as the benchmark, a major part of the investments will be in that sector which is more risky as compared to investments in large bluechip companies.
- Depending on the returns over multiple durations, you can decide the best course of action -invest more in a fund or redeem or start an SIP or STP.
Funds will either over perform or underperform against the benchmark.
This table explains how to decide if a mutual fund scheme is over performing or underperforming.
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Mutual fund scheme delivers significantly higher returns than its benchmark index
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Over performance
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Mutual fund scheme returns fall lesser than its benchmark index returns
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Over performance
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Mutual fund scheme returns equal returns of the benchmark index
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Underperformance
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Mutual fund scheme delivers lower returns than its benchmark index
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Underperformance
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Mutual fund scheme returns fall more or same as that of the benchmark index returns
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Underperformance
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If a mutual fund which is being actively managed generates returns similar to the index, it is considered as underperforming as in spite of the management fee charged, the goal of beating the benchmark returns is not attained.
If a mutual fund scheme outperforms the benchmark over several time periods, we can conclude that that it performs consistently. If the outperformance is sporadic, it may not be a great fund to invest in. If the fund has been giving lesser returns of late even when the benchmark is doing well, check if there are changes to the fund or its management. It might be worthwhile to stop fresh investments in it. indicate consistency in its performance.
Here is a comparison of three MF schemes against their benchmark – CNX 100/Nifty 100 –
If a mutual fund scheme outperforms the benchmark over several time periods, we can conclude that that it performs consistently. If the outperformance is sporadic, it may not be a great fund to invest in. If the fund has been giving lesser returns of late even when the benchmark is doing well, check if there are changes to the fund or its management. It might be worthwhile to stop fresh investments in it. indicate consistency in its performance.
Here is a comparison of three MF schemes against their benchmark – CNX 100/Nifty 100 –
Please note that performance against benchmark is not the only factor to consider before investing in a fund as past performance does not guarantee future returns. You have to consider other factors such as investment objective, fund management, expense ratio, exit load, your risk appetite and investment portfolio considerations.
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