In a move that will give distributors and investors a more complete picture of fund performance vis-a-vis its benchmark, SEBI has instructed fund officials to benchmark their schemes against Total Return Index (TRI), a benchmark that captures dividend income.
Unlike traditional benchmarks, which do not take into account dividend income, TRI includes interest, capital gains, dividends and distributions realized over a given period of time. Simply put, TRI takes into account the dividends from companies, which is reinvested. Hence, TRI provides an apt measure to reflect the true alpha created by mutual funds.
So far, two fund houses – Quantum Mutual Fund and DSP BlackRock Mutual Fund disclose performance of all active equity funds with the TRI.
The NAV of a scheme includes income from dividends; however, the index, which the schemes follow to measure its performance do not capture gain from dividends. For instance, if the scheme gets 2% dividend over a year and it has outperformed its benchmark by 2.50%, then the extent of alpha generation is only 50 basis points and not 2%.
In a circular, SEBI said, “At present, most of the mutual fund schemes (other than debt schemes) are benchmarked to the Price Return variant of an Index (PRI). PRI only captures capital gains of the index constituents. On the other hand, Total Return variant of an 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. Hence, TRI is more appropriate as a benchmark to compare the performance of mutual fund schemes.”
SEBI further said that fund houses could continue to use CAGR of TRI to compare the performance of the scheme with the benchmark. However, since the historical data of TRI may not be available, fund houses can use CAGR of PRI until the date from which TRI is available, said SEBI.
Value Research data shows that large cap schemes have outperformed Nifty 50 by 2.2% and 2.7% in three and five years respectively. Currently, the dividend yield of Nifty is at 1.25%, which shows that the large cap schemes have outperformed their benchmark by 1% and 1.5% over three and five years respectively.
This circular will come into effect from February 1, 2018.
