benchmark index
Benchmark Index is a chosen basket of stocks, like the NGX All Share Index, used as a ruler to measure whether an investment or a market did well or badly.
In plain English
Uju runs a small fashion accessories stall in Yaba and also has money in three different mutual funds, because her uncle told her never to keep all her eggs in one basket.
Every December she calls her uncle to report her results, and the first thing he asks is not how much she made, but how the NGX All Share Index did that year, because a fund that grew by 8 percent sounds impressive until you learn the market itself grew by 15 percent.
That is the whole job of a benchmark index. It is a fixed group of stocks, picked to represent a market or a sector, so that anyone can compare their own performance against something honest and public rather than against their own hopeful memory.
In Nigeria, the NGX All Share Index tracks the general market, while in the United Kingdom people watch the FTSE 100 the same way, checking whether their pension fund beat it or limped behind it.
A relative in London sending money home to fund a family investment account would ask the same question Uju's uncle asks. Did the fund beat its benchmark, or is it just riding a rising market and taking credit for weather it did not create.
Without a benchmark, every fund manager can claim to be brilliant. With one, the numbers either back up the claim or expose it calmly for what it is.
If the NGX All Share Index rose by 12 percent in a year and Uju's mutual fund, where she has ₦500,000 invested, only rose by 7 percent, her fund underperformed its benchmark by 5 percentage points, even though her money still grew.
Questions people ask
Why does a benchmark index matter if my money still grew?
Growth alone does not tell you if your fund manager did a good job. If the whole market rose by 15 percent and your fund only rose by 7 percent, your money grew but you still lost out compared to simply buying the market itself, so the benchmark shows the real story behind the number.
Is the NGX All Share Index the only benchmark in Nigeria?
No, there are several, including sector specific ones like the NGX Banking Index or the NGX Pension Index, and fund managers usually pick whichever benchmark most closely matches what their fund invests in, so always check which one applies before comparing results.
Can a benchmark index change over time?
Yes, the companies inside an index are reviewed periodically and can be added or removed based on rules like size or trading activity, so the FTSE 100 or NGX All Share Index of five years ago is not exactly the same basket of companies as today.
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