May 2: Investors in Mutual Funds will be able to make more informed decisions when schemes are benchmarked against Total Returns Index (TRI) as against Price Return Index (PRI), according to CRISIL.
PRI captures only the changes in the prices of the securities that constitute the index while TRI captures both the capital gains as well as the dividend receipts fro the index’s constituent securities assuming that dividend receipts are reinvested into the index.
For instance, the popular S&P BSE Sensex is based on the shares of 30 companies and hence, its returns are measured on the price movements of these constituent stocks. Market regulator Securities and Exchange Board of India (SEBI) had mandated that mutual funds should benchmarkt their schemes against TRI from February 2018 onwards.
Since a mutual funds’ net asset value (NAV) reflects both the capital gains and losses in its portfolio as well as the dividends received from its portfolio holdings, the TRI is a more appropriate and accurate benchmark of its performance. Globally, mutual funds are benchmarked against a TRI as best practices. India will now follow suit. Thus, if a scheme was benchmarked against the S&P BSE Sensex earlier, it will be benchmarked against the S&P BSE Sensex TRI now as per the Sebi mandate.
Dividend-yielding companies have always been an important part of the investing strategy of investors. Thus, by capturing both the dividends and capital gains, the TRI reflects the gains from dividends for investors and also drives home the benefits of investing in equities for the long term.
Mutual fund investors look at a scheme’s returns as one of the most important criteria for investing. They look for outperformance on returns versus the scheme’s peers in the same fund category as well as against the benchmark index when it comes to active mutual funds. Since the TRI index’s returns are generally higher than the PRI index’s returns, a scheme’s outperformance or the alpha generated by the fund manager against the traditional PRI index would come down to that extent.
However, investors should not take any hasty decisions following the transition to the TRI benchmark by Indian mutual funds. Instead, they should wait and consider the scheme’s performance against the new benchmark and also its performance over the long term before taking any investment decision, CRISIL note said.