The first-tier benchmark shall be reflective of the category of the scheme and the second-tier benchmark should be demonstrative of the investment style.
In what could help investors gauge the mutual fund schemes they are investing in more closely, the capital markets regulator, the Securities and Exchange Board of India (Sebi), has issued guiding principles for bringing uniformity in the benchmarks against which a scheme’s performance is measured.
According to the new directive, there would be a two-tiered structure for benchmarking of schemes falling under certain categories. “The first-tier benchmark shall be reflective of the category of the scheme and the second-tier benchmark should be demonstrative of the investment style or strategy of the Fund Manager within the category. All the benchmarks followed should necessarily be Total Return Indices,” says the directive.
Till date, each scheme used to follow a single benchmark from their respective category. Now some categories of schemes will have two benchmarks. Here are the details.
Debt-Oriented Schemes
First Tier: One broad market index per index provider for each category such as NIFTY Ultra Short Duration Debt Index or CRISIL Ultra Short-Term Debt Index for ultra-short duration funds.
Second Tier: Bespoke according to the investment style or strategy of the index. For example, AAA Bond Index.
Equity-Oriented Schemes
First Tier: One broad market index per index provider for each category. For example, S&P BSE 100 Index or NSE 100 Index for large-cap fund category.
Second Tier: Nifty 50 Index.
Hybrid and Solution Oriented Schemes
There would be a single benchmark, i.e. a broad market benchmark, wherever available or bespoke, to be created for schemes, which would then be applicable across the industry.
Thematic or Sectoral Schemes
There would be a single benchmark as the characteristics of the schemes are already tapered according to the theme or sector.
Index Funds and Exchange-Traded Funds (ETFs)
There would be a single benchmark as these schemes replicate an underlying index.
Fund Of Funds (FOFs)
In case of FOFs, the benchmark of the underlying scheme will be used for schemes investing in a single fund or else a broader market index will be used for the FOF investing in multiple schemes.
The regulator has asked the Association of Mutual Funds in India (AMFI) to publish benchmarks intended to be used by AMCs as first-tier benchmarks within a month from the date of issuance of its circular. Benchmarks are designed to be used as first-
tier benchmarks by AMCs for open-ended debt schemes as per the potential risk class matrix on or before December 1, 2021. The second-tier benchmark is optional and should be decided by the AMCs according to the investment style or strategy of
the index, says Sebi. Experts believe that the new directive well help investors gauge their fund performance in a better and more accurate way.