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Benchmarking of Mutual Fund Scheme’s performance to Total Return Index – What is TRI? | SEBI’s New Norms

When it comes to investments, ‘returns‘ is what matters to all of us. Mutual fund investments are no different. Be it an Advisor or a DIY investor, one of the main parameters that is often used to short-list’ right and best’ mutual fund schemes is the ‘past performance‘ of the MFs.

Besides looking at the past performance of a Mutual Fund scheme, we also try to compare its performance vis-a-vis with its Peers (schemes from same fund category/have similar investment profile), its Benchmark index and also with the average returns generated by its respective Fund category.

(A benchmark is a standard against which the performance of a security, mutual fund or investment manager can be measured. )

Let’s take an example, SBI Bluechip Fund (Large-cap oriented fund).

  • Fund Vs Peers – Performance comparison

(Source : Valueresearchonline.com)

  • Fund Vs its Bench-mark Vs Avg Category Returns
    • The bench-mark index of SBI Bluechip Fund is S&P BSE 100.

How to find out which is the benchmark index of a Mutual Fund Scheme?

You may kindly visit moneycontrol.com mutual fund section. You may perform ‘search’ for the concerned MF scheme. Click on ‘Overview’ section under ‘Investment info’ of a MF Scheme.

Let’s get to the main topic now i.e., Total Return Index.

As shown in the above images, a mutual fund scheme’s performance can be compared against the performance of its respective Benchmark index. As of now, the benchmark returns are calculated on the basis of ‘Price Return Index‘ (PRI).

  • What is PRI? –  A price return index considers price movements (capital gains or losses) of all the securities (stocks/bonds) that make up the index.

In our example – SBI bluechip Scheme’s fund manager picks the stocks that are primarily part of S&P BSE 100 index. He/she may or may not invest in all the Top 100 stocks (by market capitilization). But, the portfolio of SBI Bluechip fund can be similar to BSE 100 index.

As of now, most of the Mutual fund houses (except DSP Blackrock) use PRI to compare the schemes performance (espcecially Equity funds) with their respective benchmark indices.

But, with effective from 1st February – 2018, SEBI has ordered all the MFs to use ‘Total Return Index’ to benchmark the MF schemes performances.

(Click on the above image to download SEBI’s circular on Total Return Index)

What is Total Return Index? 

A total return index is an index that measures the performance of an Index (Benchmark) by assuming that all cash distributions are reinvested, in addition to tracking the components’ price movements.

A total return index (TRI) is different from a price return index. A price index only considers price movements (capital gains or losses) of the securities that make up the index, while a total return index includes dividends, interest, rights offerings and other distributions realized over a given period of time.

 A price index does not consider the returns arising from dividend receipts. Only capital gains arising due to price movements of constituent stocks are indicated in a price index. Therefore, to get a true picture of returns, the dividends received from the constituent stocks also need to be factored in the index values. Such an index, which includes the dividends received, is called the Total Returns Index.

Looking at an index’s total return is usually considered a more accurate measure of performance. Hence, TRI can be more appropriate as a benchmark to compare the performance of mutual fund schemes.

As per the SEBI, the new norms are ;

  • The performance of the schemes of a mutual fund shall be benchmarked to the Total Return variant of the Index chosen as a benchmark w.e.f 1st Feb, 2018.
  • Selection of a benchmark for the scheme of a mutual fund shall 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). The calculation of a composite benchmark performance return in CAGR terms would be as given below:
  • The calculation of composite CAGR is elaborated with an example as below;
    • For instance, ABC scheme had been launched on August 2, 1995. The benchmark PRI values are available from the date of inception of the fund. The benchmark TRI values are available from June 30, 1999. 
    • Thus, in the above example (for advertisements in the month of December, 2017 the last of the preceding month would be November 30, 2017),  CAGR of Benchmark index would be 12.20%, since inception.[(1187.70/1007.57)*(13966.58/1256.38) ^ (1/22.3452)]-1
    • How did we get 12.20%? – The benchmark index value as per PRI (when TRI data is not available) is 1007.57 points. The value of this index in TRI terms as in Nov, 2017 is 13966.58 points. The CAGR comes around 12.20%.
    • So, a fund house has to use this ‘consolidated CAGR benchmark return’ in their advertisements and compare it with the Scheme’s performance.

Price Return Index Vs Total Return Index

If we take the benchmark index that we are discussing i.e., S&P BSE 100;

  • The CAGR returns of S&P BSE 100 for the last 5 year period is around 14.5%, if we consider Price Return variant of the Index.
  • However, if take Total Return Index as the basis, the consolidated CAGR of S&P BSE 100 index comes to around 16%. (Data based on 31-Aug-2017)
  • You can observe that TRI returns are higher than PRI returns, as the TRI takes into account all dividends/interest payments. Hence, TRI is more appropriate as a benchmark to compare the performance of mutual fund schemes.

“The number of Large-cap Equity mutual funds beating their benchmarks dropped to 58% from 85% after making a comparison on TRI rather than on Price Return Index basis” – Morningstar.in

For investors, the TRI would give the actual picture of what exactly he or she earns from a mutual fund investment vis-a-vis its benchmark. From the standpoint of fund managers, it will make them work a little harder to make the right stock pick.

As a MF investor in actively managed funds, I would obviously expect funds in my portfolio beat category average returns and Benchmark index (be it be TRI or PRI variant) as well, consistently.

In case, you would like to get the Total Return Index values of all available Nifty Indices, you can find them on NSEIndia Portal.

Continue reading :

(References : Valueresearchonline, moneycontrol, morningstar, SEBI circular & TheEconomicTimes) (Image courtesy of Stuart Miles at FreeDigitalPhotos.net) (Post published on : 05-January-2018)

This post was last modified on July 12, 2023 9:30 am

Sreekanth Reddy

Sreekanth is the Man behind ReLakhs.com. He is an Independent Certified Financial Planner (CFP), engaged in blogging & property consultancy for the last 14 years through his firm ReLakhs Financial Services . He is not associated with any Financial product / service provider. The main aim of his blog is to "help investors take informed financial decisions." "Please note that the views given in this Blog/Comments Section/Forum are clarifications meant for reference and guidance of the readers to explore further on the topics/queries raised and take informed decisions. The information provided, therefore, should not be viewed as financial, legal, accounting, tax or investment advice."

View Comments

  • Hello Sreekanth,

    I like your blogs.I have a query Can I stop investing and just hold the past units in my mutual funds(SIP)?

    Thanks,
    Vaskar

  • Hey Sreekanth , When TIR reflects a better picture and returns on paper , why ere the mF's have not adopted it and stick to PRI. They would have got more investments if they would have shown TIR !

    • Dear Bharat,
      It is a better tool from investor view point.
      From the standpoint of fund managers, it will make them work a little harder to make the right stock pick. The difference between fund's returns minus PRI can be higher, whereas the returns between fund's minus TRI can be lower.

  • Dear Sreekanth, let me start with saying great blog. I recently found your website and must say you have some great knowledge. It is a very kind service that you are doing. My questions are -

    1. How is SBI Blue Chip Fund (G) fund?

    I have started investing in SBI Blue Chip Fund (G) from last four months after a lot of research. My timeline is for next 10 years. What is your opinion on this fund? I am investing rupees 10,000/month in this fund.

    2. Should I invest in Aditya Birla Sun Life Frontline Equity Fund (G)?

    I want to invest another 10,000 per month with 20 years timeline then should I invest in more in SBI or in Aditya Birla Sun Life fund?

    Thank you for your help.

  • Hi Sir first of all thanks for your informative articles because of which I started investing in mutual funds.

    I'm thinking of investing in

    HDFC balanced fund and
    Mirae asset India opportunities fund

    via sip 3000 each for 15 years for building corpus for my son's education. He's one year old.

    Are the above funds ok if not please suggest any other alternative funds to reach my goal

    • Dear Vandhi,
      I believe that DSP Balckrock has adopted TRI benchmarking for their Equity schemes.

  • Sreekanth,

    I am investing in these mutual funds. Any suggestions for improvement?

    Tata Retirement Savings Fund - Progressive Plan - Direct Plan
    Mirae Asset India Opportunities Fund - Direct Plan
    L&T India Value Fund - Direct Plan
    Aditya Birla Sun Life Tax Plan - Direct Plan
    Axis Long Term Equity Fund - Direct Plan
    SBI Magnum Balanced Fund - Direct Plan
    HDFC Balanced Fund - Direct Plan
    Franklin India Smaller companies fund

  • Hi Sreekanth, I'm planning to invest in MF, as I've never invested in MF so I'm completely new for MF.

    Goal :
    1- Daughter's Education / Marriage (She born in Nov 2017)
    2- Retirement planning (my DOB is 1987) after 25 yrs in 2045 around ~1 Cr.

    How much amount i need to invest monthly to meet both the goals and which fund would be good for lunch term.

    Thank You as always !

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Published by
Sreekanth Reddy
Tags: Benchmarking of MF SchemesMutual Funds PerformancePrice Return IndexTotal Return Index (TRI)
July 12, 2023

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