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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Performance

Which statement about comparing a mutual fund scheme's performance with its benchmark is most appropriate?

The benchmark should match the scheme's investment objective and portfolio composition. Only then does the comparison show whether the fund manager added value. Using an unrelated index, such as an equity index for a debt fund, gives a misleading picture of performance.

  1. AA debt scheme should be compared with a broad equity index to judge its returns
  2. BThe benchmark should match the scheme's investment objective and portfolio compositionCorrect
  3. CAny index may be used as long as it has given high returns recently
  4. DBenchmark comparison is relevant only for closed-ended schemes

Explanation

A benchmark is a yardstick, so it must reflect the scheme's mandate, such as a large-cap index for a large-cap fund. Comparing a debt fund to an equity index or choosing a high-performing index gives misleading conclusions. Benchmarking applies to open-ended and closed-ended schemes alike.

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