Why should you care about TRI

The Indian mutual fund industry has seen an unprecedented increase in the size of the asset under management (AUM) for the last few years. AUM has increased from Rs. 5.87 lakh crore as on March 31,  2012  to Rs. 20.59 lakh crore at the end of August 2017, about three and a half fold increase in a span of about five years. One of the reasons for such increase is promptness on part of capital market regulator, SEBI to bring in better transparency in the operation and communication from asset management companies.

SEBI is mulling a proposal to shift the benchmarking of the performance of funds to Total Return Index (TRI). Till now most of the funds in India compare their scheme performance against price return index (PRI) of indices. TRI includes price returns and all the corporate benefits such as dividends that a shareholder gets an award for holding the stocks. Therefore, if we assume dividend yield of 1.5%, PRI will be lower by the TRI by same per cent. Therefore, it will be like comparing apple to oranges.

According to a study done by a leading investment research company, alpha generated by Large Cap Funds against the broader market benchmark, S&P BSE 100 both on a Price Return as well as a Total Return basis for 5-year basis is 165 bps higher than the Price Return. As expected the number of funds beating benchmark drops from 85% to 58% after making a comparison with the TRI instead of the PRI. Therefore, shifting of performance comparison to TRI from PRI will give a true indication of the performance of funds. This will also help the fund houses in establishing greater transparency and credibility with their investor base.

We are already witnessing that some of the fund houses such as Quantum Mutual Fund, DSP Blackrock Mutual Fund and Edelweiss Mutual Fund have voluntarily shifted benchmarking their scheme performance to indices based on TRI. Most of NSE indices have TRI mentioned on the NSE website. Therefore, next time when you compare the performance of a mutual fund against any benchmark indices use TRI instead of PRI.  Nevertheless, if you are comparing two fund’s performance you can use PRI to arrive at which fund is performing better.