Did You Know | Returns must be compared with that of a benchmark to get the real picture

Returns earned from investing in any asset class or product can be looked at in two ways—absolute and relative returns

What is a benchmark?

A benchmark is a performance standard against which the returns from a security, mutual fund or portfolio manager can be assessed. For example, mutual fund products are required to showcase performance versus a suitable benchmark; a diversified equity fund uses a broad index such as BSE 500 or S&P CNX 500 as a benchmark. In fixed income, an income fund uses Crisil Composite Bond Fund index as a benchmark.

Why is a benchmark important?

Returns earned from investing in any asset class or product can be looked at in two ways—absolute and relative returns. Absolute returns are simply a return objective. This is like a minimum rate of return identified by an investor and their adviser. It is easy to understand and monitor, but not enough to evaluate performance.

As an investor you must also know how the asset class has performed and how other products within that asset class have performed. That’s why the need for a benchmark. So if your fund has given a 15% return over five years, but the benchmark to which it belongs has given 25% over the same period and the category average is also around that number, then you know your fund has underperformed and it’s better to exit.

Which benchmark is appropriate?

To be able to make a correct decision, ensure that you use the appropriate benchmark. A benchmark should ideally be in line with the risk-return profile of the product you invest in. For example, if you invest in a large-cap fund, the performance benchmark should ideally be a large-cap index such as S&P Nifty or BSE Sensex​. Crisil Liquid Fund index can be an appropriate benchmark for liquid and ultra short-term funds, which have a portfolio of certificates of deposit and commercial papers.

Compare performance only against a benchmark that is investible. This means you can’t compare the performance of listed bonds with returns offered on unlisted bonds even if you own both types of securities. Also, the benchmark should have precise and published (for investors to see) guidelines and rules. Given these, you will know the methodology of adding and deleting holdings form a benchmark and you will have historical values and holdings available for performance comparison.

Can you create a benchmark?

Where a suitable benchmark is not available, you can create your own benchmark. For example, for a fund investing in Chinese and Indian stock markets, you can take representative indices (a Chinese equity index and an Indian equity index) and combine them by taking proportionate investment weightage. Similarly, you can create other benchmarks based on the asset class you are investing in and your overall portfolio allocation.

Whichever way you do it, it is essentially to compare returns from an asset or a product with peers to understand whether it is under performing or outperforming.

Source: http://www.livemint.com/2011/11/28213737/Did-You-Know--Returns-must-be.html?h=B

Equities may see more selling pressure

Equities are likely to suffer further this week due to lack of confidence from market participants, particularly from mutual funds, and weak rupee.

According to Street experts, mutual funds are not willing to commit themselves now despite several stocks ruling at multi-year lows, as the funds fear a further fall.

The market is now completely dominated by foreign institutional investors. They will persist with selling on the back of weakening rupee.

Foreign funds pulled out about Rs 7,300 crore in nine straight trading days since November 15, according to exchange data. On the other hand, domestic institutions' net buying stood at about Rs 5,900 crore.

“We have taken a cautious stance on the Indian rupee in recent months and while the currency has weakened sharply, we do not yet see light at the end of the tunnel,” said a note from HSBC. “In an environment of moderating global growth expectations and broad de-risking, current account deficit currencies such as the Indian rupee will struggle. In our view, the INR has room to fall further if global growth expectations continue to decline and the US dollar liquidity pressures are intensifying.”

Domestic cues continued to be negative — be it policy gridlock; or elevated levels of inflation; or the likelihood of fiscal slippage. The global situation is also adding to the pressure as there are no signs of a resolution to the debt crisis in the Euro-zone.

Investors will continue to watch the developments in Europe, and overseas equities will determine the direction domestic indices will take early during Monday's session.

The cautious stance of market participants was well captured by the movement of the derivative market.

Nifty futures witnessed a rollover of 64 per cent (to December series from November), which is much lower than the three month-average of about 71 per cent. This indicates that traders who went long preferred to book losses as they fear further value erosion in the coming month.

Bank Nifty saw high rollovers but on the short side, indicating that traders expect further fall.

On the options front, 4500 and 4700 December puts have seen significant rise in open interest pointing that Nifty is likely to move in the range during the short term. Trading in Call options points a limited upside due to the strong emergence of call writers at 4800, 4900 and 5000 level.

Despite the market being oversold, there are little triggers to turnaround the Street mood. Even the clearance of foreign direct investment by Union Cabinet on in multi-brand retail failed to cheer market participants, as they expect several roadblocks, given the reservation within the Government and the Opposition.

Under such a situation, selling pressure on equities is likely to continue.

Source: http://www.thehindubusinessline.com/markets/article2665789.ece