When benchmarks cease to make senseA mutual fund benchmark is an important tool to compare the performance of a mutual fund with that of the broader market. This helps an investor know if the fund has outperformed the market, matched the market, or underperformed. From that perspective, it’s important that the benchmark index selected is relevant to a particular scheme.

During our research, we found gross mismatches between the new categories of mutual fund schemes and the benchmarks chosen for these different schemes. In this article, we look at what’s happening at the ‘short end’ of the debt fund categories – funds which broadly invest in short-dated papers. (We will cover more benchmark mismatches in a series of articles).

Our analysis, based on data provided by research firm Pulse Labs, reveals that several funds falling into different categories (and there are five categories) are using the same benchmark. In such a scenario, how relevant is the category?

SEBI has created five categories of funds at the short end of the debt market. They are Overnight Funds, Money Market Funds, Liquid Funds, Ultra short and Low Duration Funds.

A liquid fund is defined by SEBI as one which invests in securities with maturity up to 91 days. An ultra-short term fund is defined as one with a Macaulay Duration of 3 to 6 months. A low duration fund is one with a Macaulay Duration between 6 – 12 months. A Money Market fund is one which invests in money market instruments with maturity up to 1 year.

The regulator has clearly demarcated boundaries between these categories and it is only logical that funds should use different benchmarks for each category. Can an overnight fund really have the same benchmark as one which invests in say, 1-year paper?

Take an example: L&T Liquid fund has been classified as a liquid fund and uses the Crisil Liquid Fund Index. So do DSP BlackRock Money Manager Fund, an ultra-short duration fund, and DSP BlackRock Low Duration Fund, (surprise, surprise) a low duration fund. It’s not as if other benchmarks do not exist. Kotak Low Duration fund will embrace the Nifty Low Duration Index and Kotak Money Market scheme will use the Nifty Money Market Index. ICICI Prudential Savings Fund, an ultra short-term fund, will use the Crisil Ultra Short Term Debt index.

However, most mutual fund schemes have chosen to ignore these alternatives and stick to the same benchmark, regardless of category.

Funds with Crisil Liquid Fund Index as the benchmark, without being liquid funds

Ultra short term Funds using Crisil Liquid Fund Index
DSP BlackRock Money Manager Fund L&T Ultra Short Term Fund
Franklin India Ultra short Bond Fund IDBI UST
Invesco India Ultra Short Term Fund JM Ultra Short Duration Fund
Low Duration Funds using Crisil Liquid Fund Index
DSP BlackRock Low Duration Fund Edelweiss Low Duration Fund
IDFC Ultra Short Term Fund Invesco India Treasury Advantage Fund
JM Low Duration Fund
Money Market Funds using the Crisil Liquid Fund Index
Franklin India Savings Fund ICICI Prudential Money Market Fund
IDFC-Money Manager Fund-Treasury Plan Invesco India Money Market Fund
JM Money Market Fund Aditya Birla Money Manager
DSP Blackrock Savings Fund L&T Money Market Fund
Other funds using the Crisil Liquid Fund Index
L&T Cash Fund (Overnight Fund) Franklin India Floating Rate Fund (Floater Fund)

Source: Pulse Labs; List is indicative not exhaustive

Here’s a final thought to leave you with. Crisil itself has outlined the benchmarks it thinks appropriate for different categories of funds post the SEBI classification. Here are the benchmarks it thinks are appropriate for the categories discussed above:

Category Index recommended by Crisil
Overnight Funds Crisil CBLO Index
Liquid Funds Crisil Liquid Fund Index
Ultra Short Term Bond Funds Crisil Ultra Short Term Debt Index
Money Market Funds Crisil Money Market Index
Low Duration Funds Crisil Low Duration Debt Index
Neil Borate

Neil Borate is Deputy Editor, RupeeIQ. He can be contacted at neil@rupeeiq.com.