A standard market index (like Nifty 50 or Nifty 500) used as a reference point to evaluate a mutual fund's performance.
A benchmark is a reference portfolio — typically a market index — that represents the investment universe a fund is mandated to operate in. Fund managers are evaluated by whether they generate excess return (positive alpha) or underperform (negative alpha) relative to their declared benchmark, after fees.
If a large-cap fund benchmarks against Nifty 50 and Nifty 50 returns 14% while the fund returns 16%, the manager beat the benchmark by 2% (positive alpha). If the fund returned 12%, the manager destroyed 2% of value — you would have done better in a Nifty 50 index fund at a fraction of the cost.
SEBI mandates that every mutual fund scheme declare a benchmark index in its Scheme Information Document.
Common benchmarks: Nifty 50 (large-cap), Nifty Midcap 150 (mid-cap), Nifty 500 (flexi-cap), CRISIL Short Duration Index (debt).
Total Returns Index (TRI) — which includes dividends — is the fair comparison version.
Performance is reported against the benchmark over 1, 3, 5, and 10-year periods.