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Funds 202: Benchmarks for Funds

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1.
Which is the best index to use when analyzing a U.S. large-company fund's performance?
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The SP 500 Index. The DJIA is too narrow a benchmark for most large-company funds, and the MSCI EAFE index follows international stocks.
2.
Once you've calculated your personal benchmark for investing, choose a fund that _______.
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Usually returns about the same as the benchmark. It's tempting to pick a fund that returns more than you need, but remember: the greater the return, the greater the potential for loss. Be sure the fund you pick has a history of returning as much as your benchmark, or you may not meet your goal.
3.
Fund X underperformed the SP 500 by five percentage points per year during the past five years, after beating the index by just as much in the three previous years. Fund X _______.
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Probably owns something other than large-company stocks. In this case, the SP 500 is probably a bad benchmark for this fund. It likely owns something other than large-company stocks. To put its performance into better context, check its record relative to its Morningstar category peers.
4.
Which is the best index with which to compare a small-company fund's performance?
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The Russell 2000 Index. The SP 500 includes mostly large-company stocks, and the Bloomberg US Aggregate Bond Index follows bonds. Neither is an appropriate benchmark for small-company funds.
5.
In regard to mutual fund benchmarks, what are peer groups?
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Funds that buy the same types of securities. You should compare funds to others in the same peer group.