What Is Benchmark in Mutual Fund? Meaning & Examples

Financial mis-selling is a growing problem, with funds often marketed as top performers without proper explanation. A fund may promote double-digit returns, yet hide the fact that it actually lagged behind its benchmark index. 

Investors who don’t check benchmarks, risk falling for these half-truths. That’s why knowing what is benchmark in mutual fund is essential, it shows if the performance is authentic or just influenced by overall market moves. In this blog, we discuss the meaning of benchmarks, types and more.

What Is Benchmark in Mutual Fund? 

Benchmark in mutual funds, a is an index indicator used to measure a performance of a fund. It works as a reference point to compare how much an investment should have earned versus what it actually earned. 

Each fund house decides the benchmark for its schemes based on the investment style. SEBI makes it mandatory for all mutual funds to declare a benchmark, allowing returns to be compared across categories like small-cap, mid-cap, and large-cap funds.

Why Do Mutual Funds Use Benchmarks? 

Mutual funds rely on benchmarks to create a standard of measurement and provide clarity to investors, as follows:

• They act as a standard against which actual returns can be compared over a period.
• They help investors understand whether the fund manager has added value beyond normal market returns.
• They guide in setting realistic expectations, since the benchmark reflects the average market performance of that category.
• They allow fair comparison across funds of the same type, making it easier to choose between options.
• They create transparency by linking fund results to a widely recognized market index.
• They ensure regulatory compliance, since SEBI requires every scheme to declare an appropriate benchmark.

How Are Benchmarks Chosen for Mutual Funds?  

The process of selecting benchmarks for mutual funds is based on specific standards, which are discussed below:

1. Clarity and transparency: The securities included in the benchmark, along with their weightages, must be clearly stated. This ensures both fund managers and investors know exactly what the benchmark represents.
2. Investable nature: A reliable benchmark should only contain securities that investors can actually buy in the market. This makes it possible to replicate the benchmark when checking fund performance.
3. Daily pricing: The benchmark’s returns should be calculated and published daily. This ensures that mutual fund performance can be compared with updated and accurate data.
4. Historical data: Past performance data should be available for the benchmark to assess consistency and long-term effectiveness.
5. Low turnover: If the benchmark changes its securities too frequently, it becomes unstable. A good benchmark maintains consistency, making it easier to evaluate a fund’s strategy.
6. Pre-specificed: Benchmarks must be fixed before the fund is reviewed, ensuring there is no bias or selective comparison later.
7. Risk characteristics: Published data on risk levels allows fund managers and investors to compare how much risk is taken against the benchmark.

Types of Mutual Fund Benchmarks 

Mutual funds use different kinds of benchmarks depending on their category and objective, such as:

1. Broad Market Indices

These benchmarks are linked to the overall equity market and are generally used for large-cap, flexi-cap, or multi-cap funds. They reflect the performance of widely traded companies and help assess whether the fund is performing in line with the broader market environment. By comparing with indices that include both price and dividend returns, evaluation becomes more accurate. Some common examples include:

Fund Category	Benchmark Index
Multi Cap / Flexi Cap Fund	Nifty 500 Multicap 50:25:25
Large Cap Fund	NIFTY 100
Large & Mid Cap Fund	NIFTY Large Midcap 250
Focused Fund	NIFTY 500

2. Sectoral Indices

Funds that invest in specific industries use sector-focused benchmarks. These benchmarks track companies within areas like banking, technology, pharmaceuticals, or infrastructure. Measuring a fund against such an index ensures that its performance is judged within the same industry context, making the comparison more important. 

The table below shows few examples of sectoral benchmarks for different industries:

Sector	Benchmark Index
Banking	BSE Bankex Index
Infrastructure	Nifty Infrastructure
Healthcare	BSE Healthcare
Auto	BSE Auto

3. Hybrid/Category Benchmarks

Hybrid funds, which combine equity and debt, use benchmarks that balance both asset classes. An aggressive hybrid fund’s benchmark will usually have a higher equity weight, while a conservative hybrid fund’s benchmark will tilt more towards debt. This structure ensures a fair measure of performance for funds with mixed portfolios.

Below are the examples of hybrid benchmarks that cater to different risk profiles and asset allocations:

Fund Type / Asset Mix (Equity:Debt)	Benchmark Index
Aggressive Hybrid (65:35)	CRISIL Hybrid 35+65 Aggressive Index
Balanced Hybrid (50:50)	NIFTY 50 Hybrid Composite debt 50:50 Index
Conservative Hybrid (15:85)	NIFTY 50 Hybrid Composite Debt 15:85 Index

Benchmark vs Actual Returns: Performance Evaluation 

A fund’s returns is an important factor to consider while assessing its performance but it’s not the only one. To judge performance effectively, it must be compared with a suitable benchmark or peer group. This comparison helps investors see whether a fund manager is adding value, simply matching, or falling short of expectations.

Let’s use actual data from August 27, 2025, to see how this works. Suppose you invested in a Large & Mid Cap fund that delivered a 17% three-year return. On the surface, this seems strong, but the real insight comes when we place it against the category’s average and range.

Metric	Value
Your fund’s return	17.00%
Large & mid cap category average	18.46%
Best performer in category	27.96%
Lowest performer in category	12.49%

Compared with the category average, the fund underperformed by an absolute difference of 1.46 percentage points (18.46 − 17.00 = 1.46). It stands 4.51 points above the weakest performer (17.00 − 12.49 = 4.51) and 10.96 points below the top performer (27.96 − 17.00 = 10.96). This shows that while the fund produced positive returns, its manager delivered slightly less than a typical large & mid cap peer over the same period.

This type of benchmark comparison provides clarity beyond raw numbers. Positive returns alone do not guarantee strong fund management, what matters is how those returns stack up relative to both peers and the market standard.

Benchmark & Risk-Adjusted Ratios  

Benchmarks are also linked with risk-adjusted ratios that help measure a mutual fund’s efficiency in delivering returns. The main ratios are:

1. Alpha  

Alpha indicates how much a mutual fund has earned compared to its benchmark after adjusting for risk. A positive alpha shows that the fund delivered higher returns than expected, while a negative alpha reflects underperformance. For example, if the benchmark return is 8% but the fund gives 10%, the excess 2% is alpha, showing the fund’s value addition. Keep in mind that is just a simplified example, full calculations usually also consider factors like beta and the risk-free rate.

2. Beta 

Beta compares the movement of a mutual fund with its benchmark index. A beta of 1 means the fund moves in line with the benchmark, above 1 means higher volatility than the benchmark, and below 1 indicates lower volatility. This measure helps investors understand how sensitive a fund is to market-wide ups and downs.

3. Sharpe ratio

The Sharpe ratio measures excess return of a mutual fund compared to a risk-free investment, adjusted against the fund’s volatility. It uses the benchmark as a reference to judge whether the additional return compensates for the risk taken. A higher Sharpe ratio suggests better reward for each unit of risk, whereas a lower ratio indicates less efficiency in balancing risk and return.

Limitations of Benchmarks in Mutual Funds 

While benchmarks provide useful comparisons, they also have certain limitations, which are as follows:

• Missmatch with fund strategy: Benchmarks may not always match a fund’s exact investment strategy. For example, a flexi-cap fund may invest across varied market segments, but a single index may not represent its allocation accurately.
• Passive assumption: They assume a passive approach, whereas mutual funds are actively managed and may include strategies such as stock rotation, sector preference, or cash holding that benchmarks do not capture.
• Ignoring costs: Benchmarks often ignore costs such as fund management charges, transaction expenses, or exit loads. This can create a gap between theoretical returns and actual investor experience.
• Concentration risk: Sector-specific funds may be linked to narrow benchmarks, but these indices can be highly concentrated, limiting their effectiveness in reflecting broader market dynamics.
• Historical bias: Benchmarks rely heavily on historical data and past returns, which may not always reflect future performance in changing market conditions.
• Large company weightage: Some benchmarks may have high weightage for a few large companies, leading to distorted performance measurement compared to a diversified mutual fund portfolio.
• Limited personal relevance: Benchmarks work well for measuring relative performance, but they do not indicate whether a fund meets an investor’s personal financial goals or risk profile.

Benchmark Changes: What Happens When Fund Changes Benchmark? 

Benchmark changes occur when funds realign with market trends, investment focus, or regulations, as follows:

1. Shifting investment lens: When a fund changes its focus for example, moving from mid-cap to large-cap stocks the benchmark is updated to reflect the new strategy. This ensures that performance is measured against the right market segment, providing investors with a realistic view of returns relative to the fund’s objectives.
2. Regulatory triggers: Regulatory changes or compliance updates often require funds to align with new benchmarks. This keeps the fund consistent with current rules and industry standards, maintaining transparency and safeguarding investor interests.
3. Adapting to market growth: Emerging sectors like technology, renewable energy, or infrastructure may drive funds to adopt more relevant benchmarks. By doing so, the fund stays aligned with current market opportunities and avoids being evaluated against outdated indices.
4. Temporary market ripples: Short-term impacts are common when benchmarks change. Portfolio adjustments to match the new benchmark can cause fluctuations in asset allocation, sector weights, and stock selection. Investors may notice temporary volatility or differences in returns during this transition.
5. Strengthening fund credibility: A relevant benchmark provides a precise reference for assessing returns, enabling investors to compare against similar funds accurately and reinforcing confidence in the fund manager’s reporting.

Conclusion 

The answer to what is benchmark in mutual fund lies in its power to keep fund managers accountable. Benchmarks act like a scoreboard, showing whether the strategy adds value or simply rides market momentum. For investors, this isn’t just about comparison, it’s about protection from mis-selling, ensuring your money grows under proven management rather than empty promises.

FAQs