Is it necessary to beat the benchmark?
For your investments, it is always nice to have your investment to outperform the benchmark. Outperform also means getting a better or higher return than the comparison used.
While it is good, it is not necessary.
Why? Because the fund you invested is slightly different from the benchmark used as the comparator.
Stock market index are commonly used as the benchmark for unit trust funds.
The stock market index consists of selected companies that are part of the Exchange.
For example, the Kuala Lumpur Composite Index (FBM-KLCI) consists of the largest 30 listed companies in Malaysia.
If your fund uses the FBM-KLCI as its benchmark, the fund performance report will have your fund and the FBM-KLCI performance graph plotted together.
Most of the funds will outperform its benchmark.
However, what happens when your fund under performed the benchmark.
Do you need to worry about the fund managers' performance?
There is few things you need to know about the differences between the fund and its benchmark. The most important thing is that they are not exactly the same. Stock Market Index consists only Stocks in that market the index represents.
For example, the FBM-KLCI only consists of stocks listed in Kuala Lumpur Stock Exchange (KLSE). For a typical Malaysia equity fund, a look at the fund reports will show you that the fund consists of more than just stocks.
The fund has equity, bonds and money market assets. Furthermore, the stocks consists of Malaysia and other countries stocks.
Another important difference is that the components stocks are more than the index companies. For FBM-KLCI, it is only 30 companies. For a Malaysia equity fund, there may be 50 different companies. The weightage (invested percentage) of each company is also different from FBM-KLCI weightage.
Also, most overlooked factor is the RISK factor.
As the fund are more diversified and thus less risk. When you add more of your investment money at different market conditions, you also diversify the Timing Risk. When market is high, you buy less. When market is low, you buy more. In the long term, your cost will be averaged between the low and high prices.
Nobody can know the exact highest or lowest price in the future. We can only determined the lowest and highest price point that had occurred in the past.
When you invest into an equity fund, the fund is buying many stocks. Stocks are ownership of companies listed on the Stock Exchange. Companies must make profits in order to survive. All the staff are employed there to make money for the company. From the Board of Directors, CEO, CFO, Senior Management, Middle Management, Managers, Executive, Admin, Receptionist, to the Cleaners are all working to help the companies to make profit. If not, the company will close sooner or later.
So, do not worry. As long as your investment is giving a positive return in the long term, it is not necessary to beat the benchmark.
More related articles:
Investment Under Performed the Benchmark. Good or Bad News?
http://highlevelrules.blogspot.com/2018/06/investment-under-performed-benchmark.html
4S of Investment.
http://highlevelrules.blogspot.com/2017/06/what-investors-want-in-their.html
Why Equity Fund Performance Different From Benchmark.
https://highlevelrules.blogspot.com/2017/07/why-equity-fund-performance-different.html
