The benchmark is an important component when managing a portfolio as it helps fund managers determine the variation they can go for to generate higher returns. The exposure to different sectors in a fund's portfolio is often similar to the benchmark, with financial services having the highest weightage. Fund managers select companies based on their investment philosophies and allocate different weights to these holdings, which influences the fund's performance. Diversification across different fund categories helps mitigate risk, and fund managers reduce risk further by not allocating too much to the top holdings.