To serve as a credible and robust benchmark for evaluating a mutual fund scheme, what essential criteria must the chosen index satisfy?

[ A ]It must be constructed exclusively by the fund manager using undisclosed internal corporate metrics.

[ B ]It must guarantee a positive return of at least 15% during every calendar quarter.

[ C ]It must align with the scheme's investment objective, asset allocation, and investment strategy, and be calculated transparently and published regularly by an independent agency.[ CORRECT ]

[ D ]It must be revised and altered every month to match whatever stocks the fund manager currently holds.

Takeaway

Option C is correct: It must align with the scheme's investment objective, asset allocation, and investment strategy, and be calculated transparently and published regularly by an independent agency.

Derivation

A credible benchmark provides a fair, objective standard for evaluating fund performance. Under SEBI guidelines, a benchmark must: (1) reflect the scheme's core investment objective, asset allocation pattern, and investment style, (2) be constructed and calculated by an independent entity (such as stock exchanges, rating agencies like CRISIL/ICRA, or index providers), (3) be transparent, replicable, and published regularly, and (4) be Total Return variant (TRI). This question tests benchmark selection principles. A frequent error is assuming AMCs can arbitrarily create private benchmarks.

Why the others fail

A — It must be constructed exclusively by the fund manager using undisclosed internal corporate metrics.

Benchmarks must be calculated independently and transparently by recognized index providers, not designed privately by fund managers.

B — It must guarantee a positive return of at least 15% during every calendar quarter.

Market benchmarks reflect real underlying market conditions and do not offer artificial quarterly return guarantees.

D — It must be revised and altered every month to match whatever stocks the fund manager currently holds.

Frequent retrospective changes to benchmarks to flatter fund performance are strictly prohibited under SEBI governance rules.