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You can't tell how well a mutual fund has performed by studying its historical returns alone. Instead, you should compare those returns with the returns-over the same period-of an appropriate benchmark, or measuring stick. You can generally find benchmark performance figures in the fund's prospectus and annual report, as well as in newspapers and financial publications. Two types of benchmarks are used to gauge fund performance: Market Index. Tracks the total returns of all the securities in the market or a segment of the market. For example, the BSE SENSEX tracks 30 stocks representing important sectors of Indian economy. Peer Group Average. Measures the average returns of a group of funds with similar investment goals and policies.

When trying to determine a measure of performance, mutual fund investors usually look around for an appropriate benchmark to get some idea about how well their funds are doing. Many investors make the mistake of comparing all of their mutual funds to the most widely known of benchmarks, the S&P 500 Index. But this comparison can be a downright mistake which can lead to inaccurate conclusions about a fund's performance. How many times have we heard the saying "compare apples to apples and not to bananas", the idea of establishing correct or rather relevant benchmarks against which you can compare your funds performance is similar.

Coming back to comparing apples with apples -Income or Debt funds normally invest in fixed-income securities like bonds and corporate debentures. These schemes have investments with a short-to-medium term period with a specific focus of preserving the capital. Equity, or Growth funds invest predominantly in stock market instruments. Balanced Funds invest partly in equity and partly in debt and normally should be looked at with a 3-5 years time horizon. Money market and liquid funds invest mainly in short-term instruments like treasury bills, government securities, certificates of deposit, commercial paper and call money and are for a much shorter duration like even 30 days.

So just looking at the diverse portfolio ratios in terms of the type of instruments you can understand how important it is to compare the returns against the right type of benchmark. Benchmarks help in measuring the performance of fund managers. An all-equity fund should obtain returns like the overall stock market index. A 50:50 debt:equity fund should obtain returns close to those obtained by an investment of 50% in the index and 50% in fixed income. As per Sebi guidelines, for schemes in existence for more than a year, the annualized yield should be shown while for funds in existence for less than one year, such returns should not be annualized. For money market schemes and other liquid schemes of mutual funds, the performance can be shown by a simple annualisation of yields if a performance figure is available for at least 30 days. The Sebi circular also touches on the benchmarks to be used while comparing growth parameters. For instance, it has suggested that growth funds with a minimum 60 per cent of investments in equities should always be compared against BSE or NSE indices. Similarly, income funds should be benchmarked against comparable induce such as the I-Sec Bond Total Return Index.

One of the most well known index which serves as a good equity related schemes benchmark is the S&P CNX 500 is India's first broadband benchmark of the Indian capital market. The S&P CNX 500 represents about 90% of total market capitalization and about 98% of the total turnover on the NSE. The S&P CNX 500 companies are desegregated into 76 industries, each of which has an index - The S&P CNX Industry Index. Industry weightages in the index dynamically reflect the industry weightages in the market. S&P CNX Nifty is the first rung of the largest, highly liquid stocks in India. CNX Nifty Junior is an index built out of the next 50 large, liquid stocks in India. It is not as liquid as the S&P CNX Nifty, which implies that the information in the S&P CNX Nifty Junior is not as noise-free as that of the S&P CNX Nifty. It may be useful to think of the S&P CNX Nifty and the CNX Nifty Junior as making up the 100 most liquid stocks in India. S&P CNX Nifty is the front line blue-chips, large and highly liquid stocks. The CNX Nifty Junior is the second rung of growth stocks, which are not as established as those in the S&P CNX Nifty.

A stock like Satyam Computers, which recently graduated into the S&P CNX Nifty, was in the CNX Nifty Junior for a long time prior to this. CNX Nifty Junior can be viewed as an incubator where young growth stocks are found. As with the S&P CNX Nifty, stocks in the CNX Nifty Junior are filtered for liquidity, so they are the most liquid of the stocks excluded from the S&P CNX Nifty.
The medium capitalized segment of the stock market is being increasingly perceived as an attractive investment segment with high growth potential. The primary objective of the CNX MidCap 200 Index is to capture the movement and be a benchmark of the midcap segment of the market. The CNX MidCap 200 Index is a market capitalization weighted index with its base period of the index being the calendar year 1994 and base value as 1000. For inclusion in the index, the average market capitalization of a company must range between Rs.1.5 billion to Rs.15 billion. The distribution of industries in the CNX MidCap 200 Index represents the industry distribution in the MidCap segment of the market. All companies are evaluated for trading interest and financial performance.

The CNX MNC Index comprises 50 listed companies in which the foreign shareholding is over 50% and / or the management control is vested in the foreign company. The index is a market capitalisation weighted index with base period being the month of December 1994 indexed to a value 1,000. Companies in the index should be MNCs and are selected based on their market capitalisation, industry representation, trading value and financial performance. CNX PSE Index As part of its agenda to reform the Public Sector Enterprises (PSE), the Government has selectively been divesting its holdings in public sector enterprises since 1991. With a view to provide regulators, investors and market intermediaries with an appropriate benchmark that captures that captures the performance of this segment of the market, as well as to make available an appropriate basis for pricing forthcoming issues of PSEs. IISL has developed the CNX PSE Index, comprising of 20 PSE stocks. The Index is a market capitalisation weighted index with base period being the month of December 1994 and base index value being 1,000. Companies selected in the index have to be PSEs, which should rank high in terms of market capitalisation and trading value. CNX IBG Index The CNX Indian Business Groups Index (IBG) comprises of 250 listed companies. The index companies are promoted by Indian Family Houses, which may or may not have a majority shareholding in the respective companies. The CNX Indian Business Groups Index is calculated using the market capitalisation weighted method with base period being the month of December 1994 and base index value 1,000. Companies selected in the index have to be PSEs, which should rank high in terms of market capitalisation and trading value.

With the Information Technology (IT) sector in India growing at a fast rate, there is a need to provide investors, market intermediaries and regulators an appropriate benchmark that captures performance of this sector. Companies in this index should have more than 50% of their turnover from IT related activities like software development, hardware manufacture, vending, support and maintenance. The index is a market capitalisation weighted index with its base period being December 1995 with base value 1,000.

The table given below shows which index to refer to for a particular market segment -

Aru Srivastava

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