Market regulator Securities Exchange Board of India (SEBI) has made it mandatory for mutual funds to benchmark their schemes against a Total Returns Index (TRI) from February 1st, 2018. At present most mutual funds use a Price Returns Index (PRI) which constitutes only the capital gains from stock price appreciation and ignores the effect of income like dividends and interest payments.
This had helped most mutual funds show a performance better than it is. Now, with the SEBI’s latest circular asking funds to adopt TRI, mutual investors will have a better sense of how their money is performing as compared to the real returns from a comparable index.
The shift has been the subject of discussion in the industry for some time and players such as DSP Black Rock Mutual Fund have already moved to TRI.
The TRI is a type of equity index that tracks not only the stock prices but also any cash distributions such as the dividends and interest paid out, in addition to the capital gains, and that makes it an index even harder to beat.
The Price Index, on the other hand, considers only the gains that arise from the stock price movements and does not factor in dividends. Only in recent years have the NIFTY and SENSEX indices started providing both the Price Index returns as well as TRI.
How does it affect mutual fund investors?
The TRI will typically perform better than a simple price index. Hence a mutual fund that has benchmarked itself against a TRI will show less ‘alpha’, which is the returns generated over and above the benchmark.
For example, the Nifty 50 TRI from 1st Jan 2017 to 2nd Nov 2017 delivered a positive return of 29.01%. Over the same period, the Nifty 50 Price Return Index delivered only 27.44%. That is a difference of 1.57%. Therefore an equity fund benchmarking itself against a price index will show higher alpha in comparison to one benchmarking against the TRI.
The underlying concept is that by comparing itself against the TRI, an equity fund provides more transparency in its performance records and also pushes the fund manager to better actively manage the fund.
This would bring in more transparency into measuring mutual fund performance.