What Mutual Fund Benchmark Are You Following?

A mutual fund benchmark is a type of statistical measure that you can compare the performance of your mutual fund to. Here are the basics of the mutual fund benchmark and how it can help you as an investor.

Mutual Fund Benchmark

Most mutual funds today compare their performance to some type of benchmark. If the mutual fund exceeds this benchmark, they claim that they have been successful on the year. If the performance of the mutual fund does not reach the level of the benchmark that it is compared to, then you can say that the mutual fund is not performing well. Mutual fund managers look at beating a benchmark as a measure of success. As an investor, you should strive to choose mutual funds that can consistently beat the benchmark that they are competing against.

What Is a Benchmark?

Essentially, a benchmark is a financial index. A financial index is a compilation of certain investments so that you can gauge the performance of this particular group. For example, one of the most common financial indexes is the S&P 500. This is a financial index that is made up of 500 of the biggest companies in the stock market today. All of the companies in the S&P 500 are extremely large and are considered to be large-cap companies. Therefore, if you are investing in a mutual fund that regularly purchases large-cap stocks, this would possibly be a good benchmark for you to use for comparison.


There are many different mutual fund benchmarks out there for investors to use for comparison purposes. All of these benchmarks are made up of different securities and they each serve a different purpose. One benchmark that is commonly used is the Russell 2000. This financial index is made up of small-cap companies. Therefore, if you are investing in a mutual fund that invests in small-cap stocks, this would be a perfect benchmark for you to use.

Many investors like to invest in people funds that purchase international stocks. If this is the case, you should most likely look towards the MSCI EAFE index which focuses on some of the most successful international stocks in the world.

Another popular type of mutual fund is a bond fund. This is a mutual fund that invests in corporate or government bonds instead of investing in stocks. This type of mutual fund is commonly used by those that want to create a source of regular income for themselves by getting interest payments from bonds. This is usually considered to be a lower risk investment because you are dealing with bonds instead of stocks. If you are investing in a mutual fund that buys bonds, you should consider using the Lehman Brothers Aggregate index.


Although this marks are commonly used in evaluating mutual funds, this should not be the only thing that you look at. Sometimes, mutual funds are not going to beat a benchmark. However, this does not necessarily mean that you should avoid investing in them because they could do exceptionally well next year. Look at all of the factors involved in a mutual fund before deciding if you should invest in it.

Why does a mutual fund distribution lower the share price of the fund?

When a mutual fund distribution takes place, the share price of the fund will decrease immediately afterwards. This happens because the  share price of the fund is based on the net asset value of the portfolio. If the mutual fund makes the distribution, it has to sell assets that are held in the portfolio. The money that is raised from selling these assets is then distributed to the shareholders. At that point, the net asset value is recalculated for the fund and it is lowered by the amount of the distribution to the shareholders. This lowers the share price for everyone involved. 

Why does a mutual fund not always trade at its NAV?

The mutual fund NAV, or net asset value, is the average value of each share of the portfolio. In theory, a mutual fund should always trade at the NAV. When dealing with an open ended fund, this is usually the case because more shares can be created at any time. However, when you are dealing with a closed-end fund, more shares cannot be created. At this point, if demand for shares of the fund increases, you will have to pay a premium above the net asset value to buy shares. If demand goes down, you may not be able to sell shares at the net asset value. 

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