Markets regulator SEBI has recently brought a two-tier structure for benchmarking of mutual funds To standardize the benchmarks of the schemes. The first tier is benchmarked to the category of the scheme, and the second tier, which is optional, reflects the investment style of the fund manager. For first-tier benchmarks of income/debt-oriented and growth/equity-oriented schemes, the regulator has suggested a broad market index per index provider for each category. For the second tier of benchmarks of these two categories, the index may have a bespoke benchmark.
For Hybrid And for solution-oriented schemes, there would be a single benchmark, i.e., broad market benchmark wherever available or to be prepared for the schemes, which would then be applicable across the industry. Tier-1 Benchmark allows the performance of the fund to be compared with the underlying benchmark, which could be the Total Return Index (TRI) of CNX Nifty or BSE Sensex. As per the new rules, asset management companies are allowed to obtain an additional tier-II benchmark, which reflects the fund manager’s stock selection, style and exposure. For example, a research firm may create a bespoke benchmark index as per the investment strategy and style of a fund house’s plan. Experts feel that Tier-II benchmarking can help investors understand what to expect from the fund.
“Investors know that we will not deviate from the index and will not take exposure to AA rated companies. In addition, one can test the construction of the fund to assess the potential performance of the fund for the period when it is considered was not launched. As the fund will closely follow the Tier-II Index, the performance of the Tier-II Index can be a good proxy of the fund’s performance and volatility,” said Sandeep Bagla, CEO, Trust Mutual Fund, the first The fund house is using a pre-defined benchmark index.
In addition, two-tier scheme benchmarking can be used by debt as well as equity fund managers. In debt management, fund houses can have different schemes with respect to tenor, credit, maturity, roll down, etc., and each aspect can be precisely brought out by the Tier-II benchmark.
Further, Bagla believes that in equities, discrimination can be made on market capitalization, momentum, weights, etc., and alternative benchmarks can be created in equity and hybrid schemes as well as the fund manager style and strategy. can reflect.
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