In mutual fund parlance, very often we hear that a particular scheme has outperformed or underperformed its benchmark index. This index is picked up by the fund house and can serve as a standard for the scheme's returns. Benchmark indices are closely connected to the nature of the scheme. For instance, equity schemes have benchmark indices such as S&P BSE Sensex and CNX Nifty; it enables investors to compare the scheme's performance with that of the wider market. Benchmark index is used to gauge the fund manager's performance. A fund manager's aim should be that the scheme's returns outperform the index consistently. Benchmark index can be an important medium that investors can use to evaluate the scheme's performance.
It measures the volatility of a particular fund in comparison to the market as a whole. It will indicate how sensitive the returns of the fund are to the fluctuation in the market. A beta of 1 shows that the fund's NAV is closely aligned with that of the market. A beta of less than 1 implies the fund's NAV will be less volatile than the benchmark index and vice versa if the beta is more than one.
It is the return of a fund from one point to the other after factoring in the time for holding investments. It gives an idea about the value of investment during its tenure. While investments usually do not grow at a constant rate, the compound annual return smoothens out returns by assuming constant growth. For example, an investment of Rs 5,000 over a five-year period has grown to Rs 6,500 and given absolute returns of 30%, which is very high, but the gains are over five years and, hence, the CAGR is 5.38% obtained in the following manner - ((6500/5000)^(1/5))-1. CAGR calculates the growth rate of investment per annum by considering the compounding effect.