What is Benchmark in Mutual Fund?
- 17th September 2025
- 10:00:00 AM
- 8 min read
A mutual fund benchmark is a financial mirror that reflects how well the fund you have invested in is performing in relation to the market trend. As of FY25, about 54% of equity funds have outperformed their respective benchmark. It also highlights the role of fund managers in actively managing funds for an optimised return.
Understanding the Meaning of Mutual Fund Benchmark
As an investor in a mutual fund, you might have heard about the mutual fund benchmark and wonder about its function in your investment. Here is a clear breakdown of the benchmark concept in a mutual fund for your understanding:
- The term benchmark refers to market indices such as the BSE 100, Nifty 50, Nifty Midcap 100, etc.
- As per the mandate by the Securities and Exchange Board of India (SEBI), mutual fund houses are required to declare a specific index for every fund option they have.
- Thus, the houses of mutual funds assign one of the benchmarks to their funds, which reflects how well that fund performed against that benchmark over time.
- Suppose you choose to invest in a mid-cap fund. Here, the assigned benchmark can be Nifty Midcap 100, etc.
- Investing in the correct fund benchmark is important, as without it, you cannot judge whether your fund manager is adding value to your investment or not.
- Furthermore, if a benchmark does not align with the risk level and fund allocation, it leads to wrong comparisons, bad investment decisions, etc.
How Does Benchmarking Work in Mutual Funds?
When choosing a mutual fund, you must always look for one with an optimal return potential. The NIFTY Midcap 150 TRI shows a 23.88% return over a 5-year investment, which is much higher than other indices such as the Nifty 50.
Thus, let us suppose you invest in such a fund in a fund house that invests in 20 stable mid-sized companies benchmarked against the mutual fund benchmark of Nifty Midcap 150 TRI:
- Suppose after 6 months, the Nifty Midcap 150 TRI returns stand at 8%, whereas your fund has generated a return of 9% over the same time period. This means your fund has outperformed this market index.
- On the other hand, if the index return stands at 9% and your fund’s return stays at 8%, it shows that your fund has underperformed against the benchmark.
- Thus, benchmarking gives you a ground for a fair comparison, as without it, you might not understand the actual fund performance.
- However, it is always wise to compare performance against a mutual fund benchmark over a much longer investment horizon. They might be of 1 year, 3 years or 5 years to get a clear picture of performance.
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Importance of Benchmarking in Mutual Funds
Apart from ensuring whether a fund outperformed a market index or not to generate profits, a mutual fund benchmark is important in other aspects as well:
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Enhances Fund Transparency
Benchmarking highlights underperforming and outperforming funds. This transparency enables fund managers to make strategic allocation decisions for optimised returns. Suppose a benchmark return in a mutual fund delivers 12% but a fund gives only 8%, investors can question the manager’s approach or even withdraw funds to prevent further losses.
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Enables Insights into Investment Risks
A mutual fund benchmark gives you clear insights into the rewards and risks of investments. If your fund outperforms its market index across multiple investment horizons, it shows stronger performance. This also indicates a favourable risk-to-reward ratio.
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Helps to Determine Suitability
Benchmarking in mutual funds helps determine which fund is suitable for beginners and which one is for risk takers. For example, a fund tracking the Nifty 50 means a low-risk investment option that gives you exposure to the top 50 NSE-listed blue-chip companies. Small and mid-cap funds are suitable for investors with moderate to high risk appetites.
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Helps with Decision Making In Investments
Suppose two funds track the same index with varied returns, one at 8% against 9% and another at 10%. Thus, a mutual fund benchmark highlights how performance differs despite following the same benchmark. Tracking returns against the index also helps identify underperformance of funds and refine the strategy if required.
How to Evaluate Mutual Fund Performance Against Its Benchmark Index?
CAGR and ratios such as the alpha, beta and R-squared help assess the return potential of a certain fund’s performance:
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Compound Annual Growth Rate
Like most other investors, you might tend to measure fund performance against a benchmark based on absolute return. However, CAGR indicates a more accurate return as it considers the investment duration. For example, an absolute return of a fund might be 51.24% for 2 years, whereas the annualised return is 22.95%. Here, the latter is more accurate.
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Alpha as a Financial Ratio
To achieve a similar or more benchmark return in a mutual fund, Alpha is a metric that you can rely on for risk assessment. When choosing a fund, if you see that the Alpha is positive, it indicates a possible outperformance. On the other hand, a negative Alpha indicates underperformance.
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Beta as a Metric
Beta is also a sort of financial ratio to understand how sensitive your preferred fund can be to market volatility. If this financial ratio for your fund is less than 1, then it is less sensitive to volatility. Beta being 1 means it moves in tandem with the market. If it is more than 1, it is highly sensitive to the market movement.
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R-Squared
It is a statistical indicator or metric defining the correlation between the benchmark index and the fund’s performance. A fund with an R-squared value of 0 means it has no correlation, and the value of 100 means it is fully correlated with the index.
Types of Mutual Fund Benchmarks
Based on the 2 types of stock exchanges, such as the NSE and BSE, here are some benchmarks for mutual funds that you must know of:
- The BSE Sensex is quite popular among Indian mutual fund investors as it is a widely tracked index. This index is made up of 30 large-cap equity stocks traded on the Bombay Stock Exchange.
- The BSE 100 consists of the top 100 company stocks listed on the Bombay exchange based on their market capitalisation. These are also one of the common indices in the market.
- The Nifty 50 and Nifty 100 are two more types of mutual fund benchmarks. They consist of the top 50 and 100 large-cap company stocks listed on the National Stock Exchange.
- Nifty Midcap 100 is an index made up of 100 NSE-listed mid-cap stocks and also serves as a benchmark for mutual funds.
- Nifty Small-cap 100 means stocks of 100 small-cap companies listed in the NSE that certain funds follow.
- BSE midcap and BSE small-cap indices mean stocks of midcap and small-cap BSE-listed companies.
Conclusion
When you invest in a mutual fund, the fund house assigns it against a certain mutual fund benchmark, such as NIFTY 50, Nifty 100, BSE 100, etc. The fund performs as per the benchmark and generates a return either more than the benchmark or less than it. The fund manager thus actively monitors and strategises fund allocation accordingly to outperform these indices.
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Frequently Asked Questions
1. Can a mutual fund outperform its benchmark?
Yes, mutual funds can outperform the benchmark index in the market. Suppose the Nifty 50 as an index delivers 8% return and the assigned fund delivers 9%, it means that your fund has outperformed.
2. What are common benchmark indices for mutual funds?
Some common mutual fund benchmark indices are the Nifty 50, Nifty 100, Nifty Midcap 100, BSE 100, BSE small-cap, etc.
3. How do benchmarks help in evaluating mutual fund performance?
Comparing the return of a fund against a benchmark helps in fund investments. It tells you how much your investments should have earned against how much it has earned in reality. Also, financial metrics such as the CAGR, Alpha, Beta, and R-squared values help determine a fund’s potential.
4. Is it good if a mutual fund beats its benchmark?
When you invest in a mutual fund, the primary objective of the fund must be to target its benchmark return. If your fund manager can generate a return that is more than its benchmark, you can consider that your fund is performing well.
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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
