A well-designed index is transparent and clearly states the market segment it seeks to measure. Selecting the right index as a benchmark for an actively managed fund is becoming more and more important given the amount of money that has been mobilized in the industry over the years. The fund manager should look for an index that is closest to the fund’s investment objective and risk and return characteristics. Moreover, if the fund is fully collateralized, a total return index may be the right index for comparison. The fund manager may then use his selection and allocation skills to outperform the index. This is how indices play an important role as benchmarks in capital markets.
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This article was written by Utkarsh Agrawal, Senior Analyst, Research & Design, S&P BSE Indices.