Glossary of Mutual Fund Terms
Mutual Fund performance should never be looked at in isolation. The performance of a Mutual Fund or any investment should be evaluated against a standard known as the benchmark. The benchmark for a fund is decided at the time the fund is launched and the selection of the benchmark is based on the investment objective of the fund. This benchmark, comprising of either stocks, bonds, debentures, money market instruments or other securities, indicates the kind of investment choices the fund will make as part of its stated investment objective. Hence, you as an investor should expect the scheme to perform better than its benchmark over a given time frame.
Investors would have no yardstick to compare the performance of different funds, that have different investment objectives, and follow different investment strategy. Thus, a benchmark helps bring in standardization in the comparison of performance of different funds, following the same benchmark or in evaluating how a fund has performed against its own benchmark.