The Securities and Exchange Board of India (Sebi) has decided to bring in a two-tiered structure to standardise and ensure uniformity in the benchmarking of mutual fund (MF) schemes.

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The first-tier benchmark will be reflective of the category of the scheme and the second will be on the investment style of the fund manager and their total returns index.

All the benchmarks will follow the Total Return Index (TRI) that includes both capital appreciation and dividend payouts, Sebi said.

According to financial experts, this move may drive standardisation across the MF industry for easier comparison and performance reporting vis.a.vis. benchmarks.

"Within mutual funds, there are different schemes under various categories. It, therefore, becomes challenging for investors to select funds that are doing better versus the other low-performing funds. For selecting funds, an investor may want to compare returns between two different funds. The comparison is done between the fund and a benchmark which is an index, like the Nifty50 index, or Nifty MidCap etc. The new structure will allow uniformity because only a total returns index should be used for comparison,” said Prateek Singh, Founder and CEO at LearnApp.com in an exclusive interaction with CNBCTV-18.

Welcoming the move, Singh said that investors will now be able to use the same index type that includes the index's returns as well as dividends that investors would’ve received if they had invested in these stocks.

Explaining it further, Anup Bansal, Chief Investment Officer at Scripbox said that now for all MF schemes in a category, the tier 1 benchmark would be based on a broad index.

"This would mean that all schemes' performance in terms of risk-adjusted return may be benchmarked and compared in a seamless and consistent manner," Bansal said.

He added that the tier 2 benchmark will be optional and reflective of the investment style or strategy of the fund manager. "If a fund manager/fund will choose a particular tier 2 benchmark, then the fund manager/fund will be clearly defining the investment universe he/she will pursue. So, it will become easy for investors to select funds as per their goals and risk tolerance," Bansal said.

For example, Bansal said that the large-cap fund category would choose Nifty TRI as the tier 1 benchmark. The tier 2 benchmark may be based on a bespoke index made up of IT and pharma stocks because of the strategy of the scheme.

So, Bansal added, that an investor looking to invest in a combination of IT and pharma stocks may choose this scheme and compare the alpha generated by the fund manager vis.a.vis. the tier 2 benchmark (created by the fund) rather than just a comparison with the broader index chosen in tier 1.

"It would also be interesting to see the bespoke benchmarks created by various fund schemes for tier 2 benchmark. The two-tiered structure is expected to create sharper differentiation between various schemes based on the investment style and strategy of the fund," he told CNBC-TV18.

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