Synthetic index

A pure equity index cannot fairly benchmark a fund that holds both equity and debt. A single-country index cannot fairly benchmark a fund investing across several countries.

Rather than force a scheme into an ill-fitting single benchmark, the workbook allows building a synthetic index — combining two or more existing indices, weighted in the same proportions as the scheme's own asset allocation.

For a hybrid fund with roughly 65% in equity and 35% in debt (Chapter 11, section 11.6), the benchmark can be a synthetic index computed as 65% of the S&P BSE Sensex and 35% of I-Bex (ICICI Securities' Sovereign Bond Index) — a blend matching the scheme's own equity-debt split, rather than a pure equity or pure debt index that would misrepresent what the scheme actually holds.

For an international fund investing across several countries, the same logic applies to geography rather than asset class: the benchmark can be a synthetic index that blends the indices relevant to each country the scheme invests in, in proportion to the scheme's exposure to each. A fund investing largely in a single market can instead use that market's own index directly — the Shanghai Composite for a China-focused scheme, or the S&P 500 for one investing largely in the US — and only needs a synthetic blend once it spans multiple markets.

A hybrid scheme holds 65% in equity and 35% in debt. Its synthetic benchmark for a given period is:

Synthetic index return = 0.65 × Sensex return + 0.35 × I-Bex return

If the Sensex returns 14% and I-Bex returns 7% over a year:

Synthetic benchmark return = 0.65 × 14% + 0.35 × 7% = 9.10% + 2.45% = 11.55%

The scheme is then judged against this 11.55% blended figure, not against the Sensex's full 14% (which would unfairly penalise the scheme for holding a defensive 35% in debt) and not against I-Bex's 7% alone (which would flatter the scheme for taking on equity risk the benchmark itself carries none of).

An international fund investing 60% in the US and 40% in China would build its synthetic index the same way: 60% weight on the S&P 500, 40% weight on the Shanghai Composite, matched to its own geographic split.

Chapter 11 (Mutual Fund Scheme Performance), section 11.6 ("Benchmarks for Other Schemes"), gives both the hybrid-fund and international-fund synthetic index examples directly, immediately after covering gold ETF and real estate fund benchmarks. Expect a computation question building a weighted synthetic benchmark return from two component index returns and their weights.

• The weights in a synthetic index must match the scheme's own actual asset allocation or geographic split — an arbitrary blend would defeat the purpose.
• A synthetic index is not the same as a Total Return Index or a Composite CAGR — those handle dividend inclusion and TRI-availability gaps respectively, a different problem from blending across asset classes or geographies.
• A single-country international fund does not need a synthetic index — it can use that country's own index directly; the blend is needed only once a scheme spans multiple markets.
• The blend proportions can, and should, be revisited if the scheme's underlying allocation shifts materially, since a stale weighting would misrepresent the current portfolio.