174) Different Benchmarks Between Investors and Funds

It is interesting to look at the different Benchmarks used by some Unit Trust investors and the Unit Trust fund itself. 

Every unit trust fund launched has a benchmark. The benchmark is used to measure and compare between the market's performance and fund's performance. It is of the same market that the fund invested into.

In Malaysia, the equity funds main benchmark used is the FBM-KLCI. The FBM-KLCI consists of the largest 30 companies listed in Malaysia's stock market.

The fund managers will try their best to to outperform the benchmark. Outperform basically means to do better than the benchmark.

 

If the stock market went up, the fund is expected to perform better and give a higher return.

If the stock market is in a down trend, the funds are expected not to drop as much. Better if the fund can still give a positive return when the benchmark is giving a negative return.

For example,

a) Fund A gave 10% return while its benchmark gave 8% return. This means that Fund A outperformed its benchmark by 2%.

b) Fund B gave -3% return while its benchmark gave -7% return. This means that Fund B still outperformed its benchmark by 4%.

The fund managers for Fund A and Fund B outperformed.the benchmark.

This is when the understanding and expectation starts to be different.

To the investor, the Fund A did a GOOD performance.

To the investor, the Fund B did a BAD performance.

Investors of Fund B had loses in their investment.

For investors, when the fund is making positive returns, the EXPECTATION is for the fund to outperform its benchmark.

Meanwhile, when the fund is making negative returns, the EXPECTATION is for the fund to outperform the investors' source of money.

If the investors took out the money from Fixed Deposit, they expect the fund returns to be better than their Fixed Deposit return rate.

If the investors took out the money from their Retirement Account, they expect the fund returns to be better than their Retirement Account.

Most investors will have a different expectations of their investment returns.
The expected benchmark for Investment Return Rate is different from the fund's benchmark, especially in negative and low returns situations.

Do set your investment return EXPECTATION correct when you invest into Unit Trust funds.

Do consult your Unit Trust Consultant on your investments.