SEBI has come up with its new benchmarking norms for the mutual fund industry which will come into effect from January 2022. This change is mainly for bringing in more uniformity and helping the retail investors understand or compare the return in a better manner.

What is the SEBI’s Benchmarking norm?

SEBI has introduced these new Benchmarking norms which will be a two-tiered benchmark. Most of the open-ended funds will have these benchmarks. While the first or top-tier benchmark will refer to the broader category of funds and will be similar to Nifty 100 or Sensex and S&P 500, the second-tier will be demonstrating the investment style and strategies of the fund managers like AAA Bond Index. Both the benchmark will follow the Total Return Index (TRI). However, the second-tier is at the hands of the Asset Management companies. It is an option and not mandatory like the first-tier.

Additional Read: What Is an AT1 Bond, and What Are SEBI’s New AT1 Bond Rules for Mutual Funds?

Why a Benchmark is important for investors especially retail investors?

A Benchmark refers to the Indices in the stock market. For instance, if you want to compare the performance of equity investment in an IT company then the first reference point would be Nifty IT. Here the NIFTY IT is the benchmark against which the performance of a company is compared. Similarly, when it comes to mutual funds, having a similar index will help the investors understand the performance of the fund in a better way.

At present, there are different benchmark used by AMCs for the funds in the same category. SEBI intends to bring uniformity in benchmarking with this regulation. Also, retail investors come from different backgrounds. Most retail investors have very limited knowledge of the market. Thus, having a uniform benchmarking system is necessary for the mutual fund industry. This will help the retail investors understand how one scheme has been performing compared to the overall market.

It would also motivate the fund houses to beat the return of the index. This will also help the retail investors choose schemes that are continuously outperforming the benchmark index.

While the first-tier index can help in comparing the overall performance of the schemes, the second-tier index can help in comparison of the performance of schemes that have similar strategies or investment styles.

While there are multiple market indices but having indices that are specifically for the mutual funds’ performance is a great move by SEBI. While the HNIs, Institutional investors, and investors having sound financial knowledge can analyze the market well but for retail investors, it always has been a challenge. With this move of SEBI, now retail investors can have a better awareness of the performance of the funds. It will help them choose the right fund for themselves according to their risk appetite and investment goals.

Additional Read: Is the SEBIs new Riskometer regulation more investor friendly?

Conclusion

With the rapidly growing mutual fund industry, it is a welcoming move by SEBI to introduce two-tier benchmarking norms. This industry has touched a milestone this year of having more than 10 crore folios in October 2021. Moreover, the mutual fund market has grown 5 folds in the last ten years and this is mainly due to retail investors’ participation. Thus, SEBI’s new norm regarding the benchmark can motivate and inspire more retail investors to start investing in mutual funds. Wish to Investment in mutual funds? Tata Capital Wealth offers you a bouquet of funds across market caps, assets and geographies. Contact our wealth managers and investment product specialist and they will guide you the way ahead.

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