Sometimes a benchmark may even be a combination of market indices. Even investors can make a comparative analysis and figure out whether their fund managers are actually adding any value to their investments.Ī benchmark also aids fund managers in gauging whether their investments are deployed in riskier or safer securities. When actively managed funds are compared with such passive benchmarks, the true picture comes to light. Moreover, an index is an unmanaged (no human involvement) benchmark, which is why it is deemed as the default standard and tracked on a daily basis to pit against the other securities in evaluating their performance. For example, the Nifty Bank index comprises the largest and most liquid banking shares listed on the National Stock Exchange (NSE) and thus portrays a picture of the entire banking sector’s performance. This helps a portfolio manager to understand whether his investment strategy has underperformed or outperformed the benchmark index.
In the stock market, a particular index is used as the benchmark to evaluate sectoral performance, similar-sized companies, etc. They play a very critical role in the world of investing. Benchmarks are used by investors to evaluate the performance of stocks, mutual funds, Exchange Traded Funds (ETFs), etc. Anything that acts as a standard against which all other things are compared is called a benchmark.
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