Specialised investment funds are shifting from simple equity indices toward hybrid and custom performance trackers. This change makes it harder for investors to compare returns fairly, as different funds now measure success against different standards. Understanding your fund's specific benchmark is now essential for tracking whether your manager is truly outperforming.
The way specialised investment funds measure their success is changing. For years, fund managers largely used simple equity indices, such as the Nifty 500, as the primary yardstick to judge whether they were performing well. However, recent data indicates a shift, with more managers moving toward hybrid or highly customized benchmarks to track their performance.
The Three Types of Benchmarks
A recent review of 33 investment strategies shows this trend clearly. Currently, 19 of these strategies still rely on pure equity benchmarks like the Nifty 500 Total Return Index or the BSE 500 to report their results. These are relatively easy for investors to understand and compare against the broader market.
However, 11 strategies have moved toward hybrid benchmarks. These indices, such as the Nifty 50 Hybrid Composite Debt 50:50 Index or various CRISIL hybrid variants, track a mix of both stocks and bonds. This change is often intended to reflect the fund's actual asset allocation, aiming to provide a more accurate picture of risk-adjusted returns.
Finally, a smaller group of three strategies is adopting complex, custom-made benchmarks. These bespoke yardsticks are tailored to unique fund mandates. For example, firms like 360 ONE Asset have utilized custom tracks that combine the BSE Sensex TRI with short-term bond indices and the iCOMDEX Composite Index, which includes commodities like gold. While these are designed to match a specific investment style, they introduce a new layer of complexity for the average investor.
Why Benchmarking Matters to Investors
The most important takeaway for investors is the challenge of comparing performance. When every fund uses a different yardstick, it becomes difficult to perform an apples-to-apples comparison. If one fund benchmarks against a difficult, wide-reaching index and another against a custom, easier-to-beat index, the raw return numbers can be misleading.
This lack of standardization creates a risk where the actual value generated by a fund manager might be obscured. A fund might appear to be performing exceptionally well simply because it is being measured against a benchmark that is not demanding enough. Conversely, a good manager might look like they are struggling if their benchmark is set too high.
Investors should be cautious when looking at performance reports. Do not rely solely on the headline return numbers. Instead, look for the specific benchmark mentioned in the fund's offering documents or performance updates. Try to compare funds that operate within the same category and use similar benchmarks. If a fund's benchmark is highly customized, ask for clarity on why that specific mix was chosen and how it reflects the underlying risk of the portfolio. The clearer the benchmark, the easier it is to hold the fund manager accountable for their results.