After setting up his AMC, he launches several Mutual fund Strategies :
Equity Strategies : Large Cap Fund, Mid Cap Fund, Multi cap Fund etc.
Debt strategies : Corporate Bond Fund, Short Duration Fund etc
Now he needs to specify the benchmark for each of his strategies so that he has something to compare his performance against. Benchmarks also allow the investors to see if they have invested in good strategies or not.
A benchmark is a standard against which the performance of a security, mutual fund, or investment manager can be measured. Generally, broad markets like Nifty 50, Nifty 500 and bond indexes like Crisil Corporate bond Index are used for this purpose i.e. benchmarks are indexes created to include multiple securities representing some aspect of the total market. Benchmark indexes have been created across all types of asset classes.
It is important that benchmarks are relevant to the strategy of the fund, for example if the fund belongs to the large cap category then its benchmark should be Nifty 50 and not a mid/small cap index.