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 investment benchmarks and it is important to use the right one.
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.
- 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. Your performance statement uses a “money-weighted” formula to calculate your return.
If you have questions, speak to your investment advisor.