What are benchmark indices?
If you want to know how well an investment has fared, a good method is to compare it with an appropriate benchmark. A benchmark index is a standard used to evaluate a fund’s performance over time. The FTSE All-Share is an example of a benchmark index.
Where have you heard about benchmark indices?
All investment and pension funds have a benchmark. If you read documents on mutual funds you own, you might have noticed that investment companies will compare performance to a benchmark index. A stock fund, for example, might show how it has outperformed the FTSE All-Share.
What you need to know about benchmark indices...
Benchmark indices enable you to weigh up the real success of your portfolio. An annual return of 5% on a bond portfolio might seem good, but if the portfolio’s benchmark returns 6% over the same period, you’ve fallen short of your goal.
Fund managers can choose their own indices, but they have to be credible. Bond firms have created numerous indices to provide benchmarks for almost any bond you might want.
Mainstream UK funds often use the FTSE All-Share index as a benchmark. It contains about 600 of the largest companies listed on the London Stock Exchange.