Benchmarks and Performance Evaluation

EXPLANATION

Herding behaviour occurs when investors follow the crowd rather than making independent judgments. During bull markets, herding drives excessive inflows into equity funds (often at market peaks), and during crashes, herding causes mass redemptions (at market troughs). SIP investors are less susceptible to herding since investments are automated regardless of market sentiment.

EXPLANATION

Correlation ranges from -1 (perfectly inverse) to +1 (perfectly in sync). Assets with low or negative correlation diversify each other — when one falls, the other may rise or hold steady. For example, gold often has low correlation with equities, making it a good diversifier. Perfectly correlated assets (+1) provide no diversification benefit.

EXPLANATION

Expense ratio drag means the TER charged annually directly reduces investor returns. A fund with gross return of 12% and TER of 1.5% delivers net return of 10.5% to investors. For the fund to add value vs a passive index (0.1-0.2% TER), it must outperform the index by more than the additional TER cost. This is why most active funds fail to beat index funds net of expenses over the long term.