The benchmark will represent the character or style of the fund and will be well defined. Obviously, the benchmark will be backed by a reputed organisation which will impart changes to the index to reflect market changes. Thus many equity diversified funds select the BSE 200 as their benchmark. These funds will then seek to generate returns superior to this benchmark. So as the fund manager seeks to generate returns superior to this standard, investors must also track the fund s performance in this context.
Absolute returns are thus of no consequence if the funds manager s performance is to be gauged.
Ideally, in a rising market, the fund should deliver returns higher than the benchmark and when the market falls, it should fall lower than the index to which it is being compared. So, besides comparing returns over different periods of time, it is important to compare returns in bull and bear phases separately. Generally, it is observed that there are two categories of funds. Those which remain diversified over all periods of time and those which prefer to take selective bets. The first category of funds rise less than the benchmark index in bull markets and fall less than it in bear markets.