Benchmark

Reviewed by Sweta | Updated on Aug 27, 2020

Introduction

Benchmark is a standard used for comparison. In financial markets, the indexes are the benchmarks against which the performance of individual securities is compared. Thus, a benchmark is a standard against which one can measure the performance of a security, mutual fund, or investment manager.

Understanding Benchmark

When evaluating the performance of any investment, it is imperative to compare it against an appropriate benchmark. Generally, the stock and bond indexes are used for this purpose. The BSE (Bombay Stock Exchange) index and CNX Nifty are the broad benchmark indices referred to in India.

The benchmark indices help in measuring broad market performance. Benchmark indices may be created across different asset classes and sectors, such as bond index and the auto sector index.

Factors to Consider

  1. In the equity market, the large-cap, mid-cap, and small-cap stocks are represented by different indices.

  2. Benchmark indices help investors in aligning their investment decisions with the index. For example, a risk-averse investor may choose the large-cap index.

  3. An investor can also strategize the portfolio based on index stocks.

  4. Identifying and setting a benchmark can be an important aspect of investing for individual investors.

  5. In addition to traditional benchmarks representing broad market characteristics, such as large-cap index, mid-cap index, small-cap index, growth, and value, investors can also find indexes based on fundamental characteristics, sectors, dividends, market trends, and much more.

  6. When seeking investment benchmarks, an investor should also consider risk. An investor's benchmark should reflect the amount of risk he or she is willing to take.