How to Use Benchmarks to Compare Mutual Fund Returns

If you have a varied portfolio it may be difficult to compare investment returns. Each type of investment has its own market conditions that favor its growth. Comparing a bond fund return to a stock return is like comparing an apple with a lemon. To find if your investments are performing, learn to use benchmarks to compare investment returns.

Instructions

Difficulty: Moderate

Things You’ll Need:

• Investment returns for your funds
• Rate of return for the benchmarks
• Calculator

1. Know the type of fund that you own. If it is a stock fund, find out if it is large, mid or small cap. Find out if the fund is a value or a growth fund. You will need to know the type of fund to use benchmarks to compare the fund returns. Check your prospectus for the information.
2. Look at the Dow. The Dow is a collection of 30 large cap stocks. If you have large cap mutual funds then you should be getting the same average as the Dow.
3. Track the S&P 500. The S&P 500 is a blend of 60% Growth stocks that are a mix of large and mid caps, and 40% value stocks of the same mix. Use the benchmark S&P 500 to compare the return of your large and mid cap value and stock funds.
4. Investigate the Russell 2000. This is the benchmark for small caps stocks. As with any benchmark used, you might be excited about the returns of your funds, until you check the benchmark and find yours are lower than the category. The reverse is also true.
5. Compare the Lehman Government/Corporate Bond Index. This is a composite of bonds that are of investment grade and mature within a 10 year period.
6. Know that the MSCI-EAFE is the benchmark for foreign stocks from the Pacific Basin and Europe.
7. Use the Soloman Brothers World Bond Index to track the returns of foreign bonds.
8. Make it easy and use the services of a financial website such as Morningstar that gives the average (benchmark) for funds of various classes.

Tips & Warnings

• When using the S&P 500 use 4 funds, a large cap value, a large cap growth, a mid cap value and a mid cap growth. Divide the returns each by 10. Multiply the large and mid cap growth answers times 3 and the large and mid cap value answers times 2. Add all 4 numbers together. The answer will be the return that is close to the blend for the S&P 500.
• The NASDAQ composite is left out but can be used. Because of its heavy concentration in tech stocks, the usefulness as a benchmark is altered.