SEBI bats for uniformity in benchmarks in mutual fund schemes

Comparing performance of the mutual fund schemes may become easier going forward. Securities & Exchange Board of India (SEBI) has called for standardisation of the benchmarks of mutual fund schemes by bringing in uniformity.

The capital market regulator has prescribed two-tiered structure for benchmarks. The first benchmark will be reflective of the category of the scheme and the second tier benchmark should be demonstrative of the investment style or strategy of the fund manager within the category.

The recommendations about benchmarking by SEBI will be implemented from January 1, 2022.

The Association of Mutual Funds in India has been asked to decide the first tier benchmarks to be used by asset managed companies within one month. The benchmarks for open ended debt schemes as per potential risk class matrix will be published before December 1, 2021.

“The second tier benchmark is optional and shall be decided by the AMCs according to investment style or strategy of the index,” said the circular.

The uniformity of the first tier benchmark for schemes in each category should facilitate the comparison of returns. At the same time the concept of second-tier benchmark which is optional in nature gives the investors an idea of possible benchmark returns of a benchmark that uses the investment strategy used by the scheme. For debt and income oriented schemes, the first tier benchmark could be NIFTY Ultra Short Duration Debt Index or CRISIL Ultra Short Term Debt Index for ultra short duration fund category. At the same time AAA bond index can be used as second tier benchmark index to indicate the investment strategy, if the scheme is investing in AAA rated bonds.

For passively managed index funds and exchange traded funds the underlying index will be the benchmark.

The regulator’s move will bring to an end the practice of using customized benchmarks for benchmarking the scheme’s performance.

All benchmark indices prescribed for benchmarking purpose will be total return indices. Total return indices account for both the price moves as well as the dividends earned.