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What Is Total Return Index For Mutual Funds Benchmarking?


Through the circular dated January 4, 2018, SEBI has mandated all mutual fund houses to benchmark schemes against the total return index or TRI. Until now, fund houses had been using price return indices or PRIs while a few others including Edelweiss, DSP Blackrock switched to the worldwide adopted TRI benchmark on a more recent basis.

What Is Total Return Index For Mutual Funds Benchmarking?

Let us know about TRI in detail

TRI or total return index offers a more holistic view of returns as it includes not just the capital gains or losses due to price gain or fall in components of the index but also accounts for any interest and other dividend amount realized over a given time period.

With this measure in place for comparing a fund performance, a clearer alpha value can be arrived at. Alpha is a measure used to determine the fund's performance as to how much the fund has deviated in its performance against the expected.

What goes wrong when PRI is used as a benchmark for evaluating fund performance?

As the benchmark does not takes into account the dividend amount which can be in some of the cases being given by the constituent stocks, alpha value may provide with an overstated figure. This happens as the additional return on account of dividend income is not captured by the benchmark index.

What benchmarking of mutual fund schemes against TRI means for investors?

Blackrock said move towards TRI means towards "responsible and transparent communication with our advisors and investors and also sets high standards in investment management".

Hence investors will be able to get a more precise information about their fund performance with their schemes tied to the total prices index benchmark. More rational comparison of fund performance can now be made and thereby a better evaluation of an investors' earnings from mutual funds.

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