Demystifying Mutual Fund Cash Levels: Everything You Need to Know

3 min read | Updated on October 08, 2025, 16:26 IST

About Upstox

Upstox is a leading Indian financial services company that offers online trading and investment services in stocks, commodities, currencies, mutual funds, and more. Founded in 2009 and headquartered in Mumbai, Upstox is backed by prominent investors including Ratan Tata, Tiger Global, and Kalaari Capital. It operates under RKSV Securities and is registered with SEBI, NSE, BSE, and other regulatory bodies, ensuring secure and compliant trading experiences.

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The cash levels of the mutual funds indicate the amount of cash or cash equivalents held within the fund, rather than being invested in stocks. Such liquid assets are often overlooked yet are crucial in managing liquidity, minimizing risk, and facilitating investor redemption. Understanding the knowledge and reasons why fund managers hold specific portions of cash can lead to a more meaningful understanding of the fund's strategy, performance stability, and market prospects amid high volatility or uncertainty.

What is a Mutual Fund Benchmark?

A benchmark serves as a yardstick that helps investors assess a mutual fund's performance relative to a specific market index. It provides a benchmark for comparing a fund's performance relative to the overall market. Common benchmarks include the BSE Sensex and Nifty 50, among others.

Types of Mutual Fund Benchmarks

There are several types of mutual fund benchmarks, including:

Broad Market Indices, which reflect overall market performance, include common examples such as the Nifty 50 and BSE Sensex.
Sector-specific Indices that focus on particular sectors or industries, such as Nifty Pharma, Nifty Metal, and Bank Nifty.
Global Indices, which cater to investors seeking global or regional exposure, include the MSCI World Index for international equities or the FTSE Europe Index for European markets.

Importance of Mutual Fund Benchmarks

Mutual fund benchmarks serve as a scoreboard, indicating how your mutual fund is performing compared to other investments. It is similar to a match in which the point of reference is the overall average of the other participants. This is why they are needed:

Performance Measurements

Benchmarks indicate to you the performance of your mutual fund in respect to a standard. Should your fund surpass the benchmark, it is tantamount to scoring better in the game. Once it performs poorly, you had better change your approach.

Setting Expectations

Benchmarks give a clue as to what to expect. If the benchmark is achieving high returns, you would like your fund to match or exceed them. They help manage your expectations and ensure your funds are on track.

Funds Comparison

There are myriad mutual funds in the market, so finding a suitable fund is difficult. The presence of benchmarks leads to similar funds being placed in different categories for similar comparisons.

Facilitates Decision-making

Benchmarks play an important role in determining the direction of investment. An investment fund that has always outperformed its benchmark may be a nice choice. Otherwise, consider trying other options.

How to Compare Mutual Funds Against Their Benchmark

The process of comparing the performance of a mutual fund to its benchmark takes the following steps:

Find the Benchmark

Find out what the benchmark your mutual fund is being compared to is usually stated in the documents of the fund, or online in the financial websites.

Review Returns

Compare the returns of the fund with the returns of the benchmark over the same period, and how your returns in the fund amount to the gain or loss you have incurred. Positive performance implies that a greater amount of returns is generated than the benchmark.

Measure Risk

Analyze the amount of risk that the fund takes in comparison with the benchmark. As some funds carry more risk to attain a better yield, it is advisable to check whether the extent of risk carried is within your comfort zone.

Put Performance Metrics to Use

Utilise performance measures such as the Sharpe ratio, which includes risk-adjusted returns. The higher the Sharpe ratio, the better the performance against risk.

Market Conditions

The consideration has to be made based on market conditions at the time of evaluation, but this is because external circumstances can affect the fund and the reference.

FAQs

What is a mutual fund benchmark?

A mutual fund's benchmark signal is a standard, such as the Nifty 50 or BSE Sensex, used to gauge the fund's performance and compare it to the market.

Until when and why do the investors of mutual funds use benchmarks?

Benchmarks enable investors to evaluate the efficiency of fund management, gauge risk levels, and make more informed decisions regarding their investments. They also permit a similar fund comparison easily.

Is it possible to change a benchmark with a mutual fund?

Yes, a mutual fund may vary its benchmark. In the event of a benchmark variation by a mutual fund, it should provide a reason and notify investors officially. When the strategy or market focus of the fund changes, adjustments are typically made.

How do you explain cases of a fund continuously beating its benchmark?

If a fund has consistently outperformed its benchmark over time, it indicates that the fund has been performing well and is under skilled management. However, investors would likely benefit from determining whether this outperformance is accompanied by increased risk.

To what frequency do I compare my mutual fund with its benchmark?

It is recommended to benchmark the performance of your fund against its benchmark at least quarterly and annually. This helps you stay on track, gauge returns, and make timely reviews of your portfolio.

It is essential to know the benchmarks of mutual funds to measure the fund's performance. These benchmarks serve as a tool for comparison, helping investors determine returns, understand expectations, and make informed investment decisions. Monthly, you can compare your mutual fund with the one that serves as a benchmark and analyze risk-adjusted returns, thereby gaining a deeper understanding of the strategy and potential of your mutual fund. Finally, benchmarks can help you proactively respond to market fluctuations and economic changes by keeping you always in tune with your financial goals.

About Author

Mariyam Sara

Sub-Editor

holds an MBA in Finance and is a true Finance Fanatic. She writes extensively on all things finance whether it’s stock trading, personal finance, or insurance, chances are she’s covered it. When she’s not writing, she’s busy pursuing NISM certifications, experimenting with new baking recipes.