16-25 Mutual funds often compare their performance to that of the S&P 500 with the goal of “beating” it. Is this a fair comparison? Why or why not?

16-25 Mutual funds often compare their performance to that of the S&P 500 with the goal of “beating” it. Is this a fair comparison? Why or why not?

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January 14, 2022
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16-25 Mutual funds often compare their performance to that of the S&P 500 with the goal of “beating” it. Is this a fair comparison? Why or why not?

Answer and ExplanationSolution by a verified expert

Chapter 16, End of Chapter, Self Test, Exercise 16-25
Page 527
Explanation
Competition is core in every business, and it must be healthy and in the favor of the individuals as well. Even if the comparison is made it must affect the portfolio of the individuals, however, it may gain more knowledge by comparing the same with other funds.

Real example: The S&P 500 index showed a return of 33% in the year 2019, including dividends, which beat the average large-cap stock fund by 8% points. Only 29% of U.S. stock fund managers could beat the benchmark after fees in 2019. So this comparison can lead to learning and wiser decisions can be taken after such situations. [1]

Sample Response
The comparison might or might not be good:

Might: It is a fair practice performed by mutual funds as the index fund allows the investor to put the money in big, global stocks without investing individually, and is considered a good way of diversification. And same is the case of mutual funds, the funds are diversified so the comparison can be a healthy one.

Might not be: Both funds use the concept on own basis so a comparison might not be fair as it may lead to error result.

***

Works Cited

1. If You Still Own Actively Managed Stock Funds, Get Ready for Some Bad News,

https://www.barrons.com/articles/if-you-still-own-actively-managed-stock-funds-get-ready-for-some-bad-news-51579691701

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