You must have done research before deciding this. What were the findings of the research in terms of the difference in returns between a regular index and Total Returns Index(TRI)?
Simply put, the TRI represents what an investor gets to take home – the base return of the index plus dividends paid and reinvested in the index.
The only difference in the Price Returns Index (PRI) and the Total Returns Index (TRI) is that the latter includes dividends. As the name suggests, PRI only captures movements in the prices of individual stocks – any dividends declared by companies included in the benchmark are not captured in the PRI. However, as an investor, by virtue of holding the stocks, you also have an entitlement of earning dividends declared by the companies – so the TRI adds up the earnings from dividends to the PRI.
What is the rationale behind benchmarking your schemes against Total Returns Index?
An equity fund, which owns shares in companies, earns via dividends given by the companies it owns as well as via capital gains. On the other hand, the companies that form the benchmark also declare dividends, which are not captured in the PRI. Hence, the excess performance of an equity fund over its benchmark is normally overstated if compared with PRI.
Hence, we believe that disclosing our equity fund returns against TRI will help in giving the right picture of the real alpha generated by our funds. This is also in line with the global best practices of disclosing performance.
Who provides this index (Total Returns Index) in India?
All index companies always provide both, the Price Returns Index (PRI) and the Total Returns Index (TRI). For all practical purposes and so for example, the index companies of both the key stock exchanges in India viz. NSE and BSE, provide the TRI version of all of their indices and this data is made publicly available on their websites on a daily basis.
Do mutual funds overseas use such indices? Share with us the prevalence of this practice.
Disclosing performance of funds against TRI is in accordance with the recommended global best practices as included in the Global Investment Performance Standards (GIPS), which is created by a global body, the CFA Institute. GIPS is a set of standardized, industry-wide principles that guide investment firms on how to calculate and present their investment results with an objective of fair representation and full disclosure.
Since other fund houses do not use such a benchmark index, how can your funds be compared with competitive funds since it will no longer be an apple-to-apple comparison?
All disclosures of fund returns would continue without any changes. Hence, comparing returns of one fund with another would not see any change.
Since the new benchmark will reflect higher returns as it factors in dividend payouts, do you think it will be raise the bar for your fund managers?
We view this as a positive move as it will help in giving the right picture of the real alpha generated by our fund managers. It is a step towards responsible and transparent communication with our advisors and investors and sets high standards in investment management.
