Compare Apples to Apples

How do you compare a mutual fund’s* performance to its peers’? A mutual fund company may compare a fund to a benchmark whose makeup, ideally, bears the closest resemblance to the fund. A fund’s mix of investments by company size and its primary sectors, investing style and geography are among the pertinent factors needed to choose an appropriate benchmark.

Size

Size, or market cap in the case of stock funds, matters when comparing funds to ensure you compare apples to apples. The three main categories of stocks by size are large-cap, mid-cap and small-cap. You wouldn’t compare a fund with companies like Amazon, for instance, with one featuring small startup companies. Bond funds might compare themselves to peers with similar average durations. For example, compare one-year to one-year and 10-year to 10-year maturities.

Sectors

Securities are also grouped into sectors, including energy, healthcare, financials and utilities. Which sectors dominate your fund is important to know because sectors perform differently in up and down markets. Healthcare may fare comparatively well in downturns because people need it, but sales of consumer discretionary products (like automobiles) may slow during this time. Bond funds may favor government, corporate, mortgage-backed securities and more.

Style

A mutual fund can be passive, such as an index fund, or active, with managers regularly buying and selling securities. One fund may concentrate on growth stocks, while another favors value equities. The latter is typically more stable and sometimes underpriced; the former is usually more volatile.

Geography

Some mutual funds invest by geographic region, comparing their performance to similar benchmarks. Examples include domestic mutual funds, which include only securities owned by U.S. entities, and international funds, which can include the rest of the world. Other geographically — based funds may concentrate on specific regions or countries, both developing and established.

* Investors should consider the investment objectives, risks, and charges and expenses of the fund carefully before investing. Contact the issuing firm to obtain a prospectus, which should be read carefully before investing or sending money. Because mutual fund values fluctuate, redeemed shares may be worth more or less than their original value. Past performance won’t guarantee future results.An investment in mutual funds may result in the loss of principal.