Effective 1 February 2018, your fund house will need to compare its schemes with the total returns index (TRI) of its benchmark index. Although it’s a small change that your fund house would need to put in place, you may see your mutual fund investments a little differently now. For instance, the difference in returns between your fund and its benchmark index fund may not look all that big, as it has happened so many times in the past. Does that mean your fund’s performance could suddenly turn sour? No, but you would need to taper your expectations a bit.
Mint checked some of BSE Ltd’s indices and the difference in the TRI and the Price Return index (PRI) that we’re used to seeing so often around us is around 1-2 percentage points. For instance, the S&P BSE Sensex returned 5.32% over the past 10-year period, while its TRI version returned 6.85% over the same time. Say, your fund returned 10% in the same time period. In the PRI system, your fund outperformed Sensex by around 4.7 percentage points. Under TRI, it would have outperformed by just 3.15 percentage points. That is still outperformance, but do you see how the outperformance has gone down overnight by just looking at things in a slightly different way?
The S&P BSE MidCap index returned 6.17% and 20.17% in the past 10 and 5 years, respectively. But its TRI index returned 7.68% and 21.81% respectively.
The S&P Dow Jones Indices, which maintains all the BSE Ltd’s indices, and the National Stock Exchange confirmed to Mint that all their indices have TRI values. In simple words, all indices on these stock exchanges maintain the TRI and the PRI.
Some of the old indices, like the S&P BSE Sensex, which were launched many years ago, may not have TRI values since inception, but such indices have been publishing their TRI values for quite some time now.
Since the TRI is always higher than the PRI, your fund would need to climb a bit higher to show an outperformance. But that’s because the TRI values include the dividends that the underlying companies have paid. Since investors also measure their own mutual fund returns accounting for dividends received, the comparison with TRI is appropriate.
Will your fund look bad compared to its benchmark? Yes, by only a bit. But some good news is around the corner. The capital market regulator, Securities and Exchange Board of India is planning to lower the costs in mutual funds. This would improve your fund’s returns over time.