SEBI introduces two-tier structure for benchmarking MF schemes

Generally, the performance of a mutual fund scheme is assessed with reference to the benchmark, which could be the Total Return Index (TRI) of CNX Nifty or BSE Sensex.

In a circular issued on Wednesday, the regulator reiterated its stand that all benchmarks should follow the total return index. TRIs take into account the price of shares as well as dividend payout, whereas Price Return Index (PRI) like Nifty and Sensex are based on the price of the shares.

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, there must be a bespoke benchmark as per the investment style or strategy of the index.

SEBI also said that there will be a single benchmark for thematic/sectoral and index and ETF schemes.

“Similar to index funds and ETFs, if a FOF (Fund of Funds) scheme is investing in a single fund, the benchmark of the underlying scheme for the respective FOF will be used. However, if a FOF scheme invests in multiple schemes If it does, then the broad market index will be implemented,” SEBI said in a circular.

For hybrid and 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.

For other schemes, a broad market benchmark can be arrived at based on the underlying asset allocation, the regulator said.

Additionally, SEBI has advised the Association of Mutual Funds in India to publish the benchmarks to be used as first-tier benchmarks by asset management companies within a period of one month. In addition, the second level benchmarks for open-ended debt schemes are to be published by December 1. Second-tier benchmarks are optional.