From February 1, all fund houses will have to benchmark their equity and balanced funds to Total Returns Index (TRI) instead of the current practice of benchmarking against Price Return Index (PRI).
Price Returns Index (PRI) only captures capital gains of the index constituents whereas Total Return Index (TRI) takes into account all dividends/ interest payments that are generated from the basket of constituents that make up the index in addition to the capital gains. Total Return is viewed as a strong measure of an investment’s overall performance and an apt measure to reflect the true alpha created by mutual funds.
So far, only DSP BlackRock and Quantum Mutual Fund benchmark their schemes against TRI. The issue came into spotlight when DSP BlackRock recently announced that they will benchmark their schemes against TRI. In a recent forum, SEBI Whole Time Member G Mahalingam had said the industry should move towards TRI which is true measure of fund performance. Industry officials say that SEBI had sought information on scheme benchmarks from fund houses recently.
SEBI has said that selection of a benchmark should be in alignment with the investment objective, asset allocation pattern and investment strategy of the scheme.
“Mutual funds shall use a composite CAGR figure of the performance of the PRI benchmark (till the date from which TRI is available) and the TRI (subsequently) to compare the performance of their scheme in case TRI is not available for that particular period(s),” said the SEBI circular issued today.
We believe that benchmarking against TRI would give a truer representation of the alpha. Morningstar compared the alpha generated by large-cap funds over the broader market benchmark, both on Price Return Index (PRI) as well as Total Return Index (TRI). Over a 5-year basis, the TR of the S&P BSE 100 is 165 bps p.a. higher than the PR. As expected, the number of large cap funds beating the benchmark dropped from 85% to 58% after making a comparison with the TRI instead of the PRI.
