Benchmarks Decision Support For Mutual Fund Investment

Post on: 17 Апрель, 2015 No Comment

Gauging Performance

Community school boards use standardized tests to gauge how their students perform in relation to national averages. On an even more basic level, your local weather forecasters can check the accuracy of their predictions by measuring temperatures and rainfall. As a mutual fund investor, you also have tools available to gauge the performance of your investments. Such tools are known as market benchmarks. The challenge, however, is choosing the tool that most accurately serves your purpose.

What Are Investment Benchmarks?

The dictionary defines a benchmark as a point of reference for measurement. Market benchmarks are used by individual investors, portfolio managers, and market researchers to determine how a particular market or market sector performs. Often cited in news reports, market indexes can be especially helpful to mutual fund investors by offering market standards to help them evaluate the risk and the return history of their own investments. Of course, past performance is not indicative of future results. Also, investors should remember to compare their mutual fund to the index that best tracks securities comparable to the fund’s holdings, and to use an appropriate time frame.

Identifying The Appropriate Index For Money Market, Bond, And Equity Funds

The appropriate index for your needs is not always easily identified by its name or popularity. For example, most people have heard of the Dow Jones Industrial Average, since its closing figures are quoted nightly on news broadcasts. However, many people may not be aware that the Dow tracks only 30 stocks of some of America’s largest companies — not a very reliable source for comparison if your fund’s holdings include small-capitalization or international companies.

For each category of mutual fund, there are several popular indexes:

For Money Market Funds*

IBC’s Money Fund Report Averages. These benchmarks track the averages of taxable and tax-free money market fund yields on a 7- and 30-day basis.

*An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

For Bond Funds

Barclays Aggregate Bond Index. A combination of several bond indexes, Barclays indexes are among the most widely used benchmarks of bond market total returns.

10-Year U.S. Treasury Bond. The yield on this long-term U.S. government bond is often looked to as the standard bond yield for long-term bond investments.

Bond investments are subject to interest rate risk so that when interest rates rise, the prices of bonds can decrease and the investor can lose principal value.

For Equity Funds

Standard & Poor’s Composite Index of 500 Stocks (S&P 500). A broad-based, unmanaged measurement of the average performance of 500 widely held industrial, transportation, financial, and utility stocks. Many people believe that this, among the most often cited indexes, includes the 500 largest stocks on the New York Stock Exchange. Not true: In fact, it includes the stocks of companies that are or have been leaders in their respective industries, and that are listed in the New York Stock Exchange, the American Stock Exchange, and the Nasdaq Market System. The industry weightings in the S&P 500 are selected to reflect the components of gross domestic product.

The Nasdaq Composite Index. This large index (over 2,800 issues) was created in 1971 to measure all domestic common stocks that are traded on the Nasdaq exchange that are not part of the National Market System.

Morgan Stanley Capital International’s Europe, Australasia, Far East (EAFE) Index. The most prominent of the indexes that track international stock markets, the EAFE is composed of companies considered representative of 21 European and Pacific Basin countries.

Equity investments are subject to market risk including loss of principal.