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Journalism of Courage
When an investor tries to gauge the performance of his mutual fund scheme,he looks at its returns vis-à-vis two criteria: the average performance of the entire category to which the fund belongs,and its benchmark. Normally,funds choose one of the leading indexes Sensex,Nifty,BSE 100,or Samp;P CNX 500 as their benchmark. It is important that a fund house chooses the appropriate benchmark for its scheme as selecting the wrong benchmark can distort the evaluation of a funds performance. For instance,a highly diversified fund should not have a concentrated index,such as the Sensex,as its benchmark.
A recent study by CRISIL Fund Services found that nearly 56 per cent of open-ended equity funds showed reasonable robustness in the selection of their benchmarks,while 44 per cent were found wanting. The study covered 147 open-ended equity schemes with a three-year track record. Funds were graded on the suitability of their benchmarks using both qualitative and quantitative criteria. The qualitative assessment depended on how appropriate was the benchmark in view of the schemes name,investment objective,and positioning. The quantitative assessment was based on statistical measures such as R-square,beta and tracking error.
Whats a good benchmark?
According to Krishnan Sitaraman,director-CRISIL Fund Services,A good benchmark is one whose constituents reflect the funds objectives as closely as possible. It should help investors get the right perspective on a funds performance. As for how asset management companies should select the right benchmark,he adds: Investment objective,theme and investment strategies should be looked at critically while selecting a benchmark. The correlation of these factors should then be checked with that of available benchmarks. Customised benchmarks may be considered in cases where an appropriate benchmark with a good correlation is not available.
Besides helping investors,a good benchmark allows fund managers to assess how well a particular portfolio or strategy has done. Trustees can use it to assess the performance of their fund managers. Benchmarks also represent the risk-reward relationship of different asset classes. They can be used by fund managers to take the right asset allocation decisions, adds Sitaraman. Henceforth,when selecting a scheme,pay attention to its benchmark and make sure that the fund and the benchmark match in terms of the funds objective,level of risk and diversification,and so on.
