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What is Mutual Fund Benchmark and its Importance?

Mutual funds are an investment option which have recently gained popularity and have gained an investor base very fast. New investors every hour is inclining towards this new mode of investment and investing in it. But there are many questions in the minds of the investors before they invest I n the various schemes of the mutual funds.

Knowing the basics of the mutual funds is necessary if one is going to invest in any such scheme. Mutual funds pools in money from many investors and they invest in the stock market. The mutual fund holder is basically a person who owns a part of the stock and thus is entitled to partial profits and risks. It’s like having a small slice of pizza from a very large slice. If that tastes good then it is good for the one getting it and if it tastes ugly then he alone doesn’t have to bear the burden of finishing it.

One term that one should know about mutual fund is the benchmark in the mutual fund. A lot of people who come to know about the mutual funds usually ask this question as to what benchmark in the mutual fund is and what is its importance?

 

Benchmark is a parameter or a standard against which the performance of the mutual fund or the investment manager is measured. When we evaluate the performance of any scheme that we are thinking to invest in, it is very important that we have something to compare it with that is what benchmark is. In the field of investment and finance, there are many indexes that analysts use to find out or determine the performance of a particular fund or a scheme.

When an investor sets a benchmark he or she is able to communicate efficiently with his/ her portfolio manager and thus the portfolio manager clearly knows, what the investor is looking for and would then design the portfolio of investment accordingly. The goals in the mind of the portfolio manager would now be in accordance to what the investor wants to achieve. While the benchmark helps a portfolio manager in his work it also the investor to clarify his mind and set his goals accordingly as to what he expects from his investment.

The benchmark of an investor should reflect the degree of risks he is willing to take. It should also be as per the amount to be invested and the cost the investor is ready to give. Along with that the benchmark should also have the clear indication of type of investment the investor is looking for. The benchmarks for various types of investment are different then there are types of investments where there is no set benchmark as is the case with the investments in real estate as there every investment turns out to be different in nature.

The portfolio managers work to either meet the benchmark standards set by the investor or at times they try to best or out do it. While beating the benchmark standards, does impress the investor and makes him/ her happy but it may also put the portfolio under risks. It is important to have the right guidance when you are new to the field of investments, to avoid unnecessary downfalls. I personally found websites like Groww, very helpful for this purpose. If you feel that investing in systematic investment plan is the right choice, you can invest now in SIPs.
 

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