Investor Education

Investor Education

Discovering Mutual Funds

Benchmarks and indexes

To really understand how a mutual fund is performing, you have to put it in context. For instance, when you want to measure the performance of a car you’re considering, you’d compare it side by side with another car. (Putting it next to a bicycle isn’t going to give you a realistic comparison.) Similarly, mutual funds need to be looked at in a way that will give you useful information.

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Mutual fund companies select a benchmark to give you a gauge of a particular fund’s performance. A benchmark is like a target—the fund should hit (or hopefully, beat) the benchmark’s performance. Usually, fund companies use a specific index as the benchmark. An index looks at all the stocks in a particular market segment and measures the overall performance. For instance, the Russell 2000 is an index that measures the performance of the smallest 2,000 U.S. companies in the Russell 3000 Index—a broad market index. The Russell 2000 would be an appropriate benchmark for a mutual fund with mostly small cap holdings.

A mutual fund company will identify what it believes is the best benchmark for a fund in the fund’s prospectus. You can see the benchmark for a Wasatch Fund when you visit its Objective & Strategy page in the Our Funds section.