Under SEBI's guiding principles for bringing uniformity in benchmarks, how are Tier-1 and Tier-2 benchmarks defined for debt and equity mutual fund schemes?

[ A ]Tier-1 benchmark is a broad market index reflecting the category of the scheme, whereas Tier-2 benchmark is bespoke, demonstrating the specific investment style or strategy of the Fund Manager.[ CORRECT ]

[ B ]Tier-1 benchmark is for retail individual unitholders, while Tier-2 benchmark is used exclusively for foreign institutional investors.

[ C ]Tier-1 benchmark measures only dividend yield, while Tier-2 benchmark measures scheme cash balances.

[ D ]Tier-1 benchmark is optional, while Tier-2 benchmark is updated every hour during stock market trading.

Takeaway

Option A is correct: Tier-1 benchmark is a broad market index reflecting the category of the scheme, whereas Tier-2 benchmark is bespoke, demonstrating the specific investment style or strategy of the Fund Manager.

Derivation

SEBI introduced a two-tiered benchmarking framework to provide standardized category comparison while allowing fund managers to demonstrate bespoke strategies: Tier-1 benchmark represents a standardized broad market index for the entire scheme category (e.g., Nifty 100 for Large Cap; CRISIL Liquid Debt Index for Liquid Funds). Tier-2 benchmark is optional/bespoke, reflective of the specific investment style or strategy executed by the fund manager within that category (e.g., Nifty 50 or AAA Bond Index). All benchmarks must be Total Return Indices (TRI). This tests the two-tiered benchmark framework. A common error is thinking tiers differentiate retail vs institutional investors.

Why the others fail

B — Tier-1 benchmark is for retail individual unitholders, while Tier-2 benchmark is used exclusively for foreign institutional investors.

Benchmarking tiers define market category vs investment strategy comparison, having no relation to investor citizenship or size.

C — Tier-1 benchmark measures only dividend yield, while Tier-2 benchmark measures scheme cash balances.

Both Tier-1 and Tier-2 benchmarks measure total investment returns (TRI), not narrow cash or dividend standalone metrics.

D — Tier-1 benchmark is optional, while Tier-2 benchmark is updated every hour during stock market trading.

Tier-1 benchmarks are mandatory across all mutual fund scheme categories and are published on a daily basis, not hourly.