The best way to understand how your investments are performing is to review your statements.
Sometimes, it can be helpful to use a benchmark to evaluate your investments but it is important to understand the limits of this comparison. Here are some tips to help you.
A benchmark is information that helps you compare performance.
Students compare their marks to the class average to understand how well they did. In the same way, an “investment benchmark” helps you understand how well your investments performed.
Choosing the Right Benchmark
You would not compare your math mark to the class average on an English test. In the same way, you must not compare your equity fund to a benchmark for bond funds.
There are many different benchmarks and it is important to use the right one. Some funds do not use benchmarks. A fund that uses a benchmark will list it in its Management Report of Fund Performance. You can get this report online. You can also ask your advisor for this information.
Investment benchmarks are usually a group of securities known as a “market index”. One common example is the S&P/TSX Composite Index.
A market index provides good historic information but it isn’t a perfect comparison to your investment for three reasons:
- A market index does not reflect the costs of managing and operating a mutual fund. To compare your mutual fund to a benchmark, subtract the fund costs from the benchmark.
- A market index measures performance over a specific time period. If you held the mutual fund over a different time period, it will not be a perfect match.
- Benchmarks use a “time-weighted” formula to calculate performance. The statement that you will receive after 2016 will use a “money-weighted” formula to calculate your return.
For these reasons, your return might not mirror the benchmark for the fund.
If you have questions, speak to your investment advisor.