In August, asset management firm DSP BlackRock Investment Managers Pvt. Ltd. announced it would be disclosing the performance of its active equity mutual funds with The Total Return Index (TRI) as the benchmark. Here is a rundown of the term:
How has equity mutual fund performance been measured so far in India?
Currently, a majority of fund houses benchmark their equity mutual fund schemes against simple price indices which capture only the change in price of the stocks that are components of the said index.
An index comprises a basket of securities taken at the prevalent market price. For instance, two of India’s popular indices Sensex and Nifty comprise shares of 30 companies and 50 companies respectively and the returns are measured based on price movements of the index components. So, an equity mutual fund’s performance was measured against the performance of their respective benchmarks.
What is The Total Return Index?
A Total Return Index takes into account not just the Price Returns of the stocks but also dividends paid out on the stocks.
According to investment research and investment management firm Morningstar, globally, Total Returns Indices are commonly used as the primary benchmarks for comparing fund performance, but in India this trend is only now taking off. Historically, Indian indices have always been tracked for the Price Return, but now you can find historical Total Returns data for most indices, although they are not widely tracked yet, the firm said.
What is the advantage in using the Total Return Index?
BlackRock has said that total returns included interest, capital gains, dividends and distributions realised over a given period of time.
The TRI will help in giving the right picture of the real alpha (a metric which measures what the fund has earned over and above — or below — what was expected.
The alpha that is shown currently may look overstated as dividends are not added in benchmark returns calculation and the move towards TRI is a step towards “responsible and transparent communication with our advisors and investors and also sets high standards in investment management,” BlackRock said.
Morningstar has compared the alpha generated by Large Cap Funds against the broader market benchmark on both Price Return as well as Total Return basis for a 5-year period.
According to the firm, the Total Return of the benchmark S&P BSE 100 was 165 basis points higher than the price return.
The number of equity mutual funds beating the benchmark dropped to 58% from 85% after making a comparison on TRI rather than on Price Return Index basis, it said.
What does TRI mean for stakeholders in a mutual fund?
From an investor stand point, TRI would give the actual picture of what exactly he or she earns from a mutual fund investment. From the standpoint of fund managers, it will make them work a little harder to make the right stock pick.
For instance, according to Morningstar, the typical dividend yield on benchmarks is in the ballpark of 1.5% per annum, which means that the TRI benchmark will be harder to beat by 150 basis points per annum.
One has to wait and see how the TRI changes the working style of fund managers and their performance in India.
