12.5 Benchmarks for Debt Schemes and Other Schemes

Two Dimensions for Debt

An equity benchmark is matched principally on market capitalisation. A debt benchmark must be matched on two dimensions simultaneously:

1. Duration — the interest-rate sensitivity of the mandate
2. Credit quality — the rating profile the scheme is permitted to hold

A mismatch on either produces a meaningless comparison. Benchmarking a credit risk fund against a gilt index rewards it for taking credit risk; benchmarking a short duration fund against a long duration index rewards or punishes it for a duration position it was never permitted to take.

Benchmarks by Debt Category

The Sectoral Debt Fund category was introduced by SEBI's revised categorisation, requiring at least 80% in debt of a single sector such as financial services, energy, infrastructure, housing or real estate, and predominantly high-rated paper. Its benchmark must reflect that sector rather than the broad debt market.

Why the Duration Match Matters So Much

Debt returns are driven by accrual plus price change, and price change scales with duration. Two schemes with identical credit quality but different duration behave completely differently in the same rate environment.

Illustration. Yields fall 0.75% across the curve.

Short duration fund, modified duration 2.0  ->  price gain approx 1.5%
Long duration fund,  modified duration 8.0  ->  price gain approx 6.0%

Comparing the short duration fund against a long duration benchmark would show a 4.5 percentage point shortfall that reflects nothing but the mandate. The manager was required to stay short.

Hybrid Schemes: Composite Benchmarks

A hybrid scheme requires a benchmark blending equity and debt in the mandated proportion.

Dynamic asset allocation and balanced advantage schemes are the difficult case. Because equity exposure varies with a model, no fixed blend describes the mandate at all times. A composite benchmark is still prescribed, but the comparison is inherently looser, and a distributor should understand that outperformance or underperformance in such a scheme partly reflects where the model happened to be positioned.

Other Schemes

Gold and silver schemes are benchmarked against the domestic price rather than the international one, because the domestic price incorporates the rupee-dollar rate and applicable import duties, and it is the domestic price that the scheme's holdings actually track.

International schemes must be assessed on a currency-adjusted basis. A scheme that lagged the foreign index in local currency terms may have outperformed in rupee terms, or the reverse, depending on how the rupee moved.

Life Cycle Funds, introduced in SEBI's revised categorisation, follow a glide path from equity towards debt as the target maturity year approaches. Their benchmark must reflect the allocation applicable at the relevant stage, so the appropriate blend changes over the scheme's life.

Applying This in Practice

When assessing any debt scheme, check three things in the fact sheet before looking at the return:

1. Modified duration — is the scheme positioned as its category requires?
2. Rating profile — is the credit quality what the benchmark assumes?
3. Yield to maturity — is it consistent with that duration and rating profile, or unusually high?

A return figure examined without those three is a number whose cause is unknown, and a scheme's outperformance is only interesting once you know whether it came from skill or from taking risk the benchmark does not carry.