Benchmark

A return figure on its own does not tell you much. A fund that gained 8% in a year might sound good, but if similar investments gained 15%, it actually performed poorly. A benchmark provides that comparison.

Benchmarks are chosen to match the type of investments being measured. A fund investing in large US companies might use a broad index of large US shares. A global bond fund might use a global bond index. A mixed portfolio might use a blend of indices, such as 60% of a share index and 40% of a bond index.

For example, if a fund returns 9% while its benchmark returns 7%, it has outperformed by two percentage points. If it returns 5%, it has underperformed.

Choosing the right benchmark matters. Comparing a fund of small, risky companies with an index of large, stable companies would be unfair in either direction. Investors should check that a fund's benchmark reflects what it actually invests in and judge performance over several years rather than a single period.