New Two-Tiered Benchmarking Structure for Mutual Funds Explained

Introduction

To enhance standardization in the benchmarks of Mutual Fund Schemes, a new two-tiered benchmarking structure has been introduced, considering the recommendations from the Mutual Fund Advisory Committee (MFAC).

Main Content

Two-Tiered Benchmark Structure

The benchmarking framework consists of:

First Tier Benchmark: Reflects the overall category of the scheme.
Second Tier Benchmark: Represents the investment style or strategy employed by the Fund Manager within that category. All benchmarks utilized must be Total Return Indices.

Guiding Principles for Benchmarks

Income / Debt Oriented Schemes

First Tier: Utilize one broad market index per provider, such as:
- NIFTY Ultra Short Duration Debt Index
- CRISIL Ultra Short Term Debt Index (for Ultra Short Duration Fund Category)
Second Tier: Custom benchmarks based on investment style/strategy, e.g., AAA Bond Index.

Growth / Equity Oriented Schemes

First Tier: Employ one broad market index per provider, such as:
- S&P BSE 100 Index
- NSE 100 Index (for Large Cap Fund Category)
Second Tier: Tailored benchmarks per investment style/strategy, e.g., Nifty 50 Index.

Hybrid and Solution Oriented Schemes

A single benchmark—either a broad market benchmark or a bespoke benchmark—will be created to apply across the industry based on availability.

Thematic / Sectoral Schemes

A singular benchmark will be established since the characteristics of these schemes align with their specific themes or sectors.

Index Funds and Exchange Traded Funds (ETFs)

A single benchmark will be applied since these funds replicate an underlying index.

Fund of Funds (FoFs) Schemes

If a FoF invests in a single fund, the underlying scheme's benchmark will be used.
If a FoF invests in multiple schemes, a broad market index will be applied.

Other Schemes

A broad market benchmark will be determined based on the underlying asset allocation.

AMFI Obligations

The Association of Mutual Funds in India (AMFI) is required to:

Publish the first-tier benchmarks for AMCs within one month from the issuance of this circular.
Provide first-tier benchmarks for open-ended debt schemes, aligned with the Potential Risk Class Matrix, by December 1, 2021.

Second Tier Benchmark

The second tier benchmark is optional and will be determined by AMCs according to the investment style/strategy of the associated index.

Applicability of the Circular

The framework outlined in paragraph 3(a) will take effect from December 1, 2021.
The framework in paragraph 3(b) will come into effect from January 1, 2022.

Authority

This circular is issued under the authority granted by Section 11(1) of the Securities and Exchange Board of India Act, 1992, in conjunction with Regulation 77 of the SEBI (Mutual Funds) Regulations, 1996, aimed at protecting investor interests and fostering market development.

Conclusion

This initiative ensures a comprehensive approach to benchmarking in mutual funds, promoting transparency and consistency across the sector.