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1) The primary objective of a mutual fund is to perform better than a passively constructed portfolio, which is called a benchmark.
2) A benchmark should be independent, replicable and representative of the objectives with which a fund is managed.
3) The benchmark is always predefined. Hence, an equity fund that focuses on large-cap stocks, will try to do better than an aligned benchmark, such as the Sensex or the Nifty.
4) Whenever a mutual fund declares its returns or lists its historical performance, it is mandatory for the fund to disclose the performance of the benchmark along with it.
5) A mutual fund is not designed to deliver an absolute level of return. Its return tends to track the benchmark, sometimes beating it, while underperforming it on other occasions.
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