Mutual Funds: Do You Need to Beat the Benchmark?

Do you want inflation-beating returns from your investments? Are you looking for an excellent option to attain long-term financial goals? You may consider investing in equity funds where the fund manager and the research team selects the right stocks based on the fund’s investment objectives. It helps if you pick funds that match your financial goals and risk appetite. However, should you focus on equity funds that have beaten the benchmark? 

Do you need a benchmark for equity funds?

You may compare the performance of an equity fund against the benchmark before investing your money. For instance, you can compare the performance of a large-cap fund against the Nifty 50. 

You must measure the performance of your equity fund against a benchmark. It sets a minimum performance standard and helps manage the risk in equity investment. For instance, you could exit an equity fund that has underperformed the benchmark over some time. 

You may use the benchmark to gauge the performance of the mutual fund manager. For instance, you may have a well-managed fund that has outperformed the benchmark over three to five years. However, past performance won’t guarantee good returns in the future. 

Do you need to beat the benchmark with equity funds?

You may find many equity funds underperforming the benchmark over some time. However, some equity funds may have delivered reasonable returns despite underperforming the benchmark. For example, an equity fund may have offered an average return of 10%-12% over five years and still underperformed the benchmark. 

You may consider investing in equity funds to attain investment goals based on your risk tolerance. It helps if you invest in an equity fund that helps you attain investment objectives rather than focus only on outperforming the scheme benchmark. Otherwise, you will be chasing returns if you focus only on the top-performing funds.

You must focus on the required return approach to gauge the potential return from your portfolio. It helps you set expected returns from your equity portfolio based on financial goals and risk profile. However, the mutual fund manager of the equity fund may focus only on maximising returns based on the investment style and fund objectives. 

It would help if you picked equity funds based on their potential to help you attain your financial goals. Moreover, you must be comfortable with the investment style of the fund manager. For instance, you may be comfortable with the value style of investing, whereas the fund manager of the equity fund follows the growth style. 

You may construct your portfolio with equity funds that match your investment objectives and risk tolerance. It helps you attain financial goals within set timelines. For example, you could invest in large-cap funds, index funds and ELSS to build your core portfolio. It forms around 60%-70% of your equity portfolio and offers stable returns over the long run. 

You may invest in mid-cap funds, sector funds and Flexi-cap funds as part of your satellite portfolio. It helps enhance overall portfolio performance over some time. 

Should you exit the equity funds that fail to beat the benchmark?

You may invest in equity funds after checking the essential parameters such as the expense ratio, underlying portfolio, assets under management (AUM) of the fund, and the fund manager’s investment style. It helps if you invest in equity funds after checking the performance against the benchmark and peers. 

However, do not exit an equity fund if it fails to perform against the benchmark for one or two quarters. You could check other parameters before concluding. It’s best if you redeem your equity fund on an underperformance against the benchmark over two to three years. 

You must gauge the performance of your equity portfolio based on your expected return rather than benchmark performance. In a nutshell, you may stick with equity funds that help you achieve your financial goals rather than chase benchmark-beating returns.

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in