SEBI has reportedly asked fund officials to benchmark their schemes against Total Return Index (TRI), a benchmark that captures dividend income.
G Mahalingam, Whole Time Member SEBI has reportedly said that the market regulator wants fund houses to benchmark their active equity funds against TRI. He said this will give the distributors and investors a truer picture of the fund performance with respect to the benchmark. He was addressing fund officials at the AMFI AGM recently today in Mumbai, said three CEOs who attended this meeting.
Appreciating a few fund houses for voluntarily adopting a practice of disclosing their returns with TRI, he reportedly said that the market regulator would appreciate if all fund houses follow suit.
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. While Quantum Mutual Fund is the first fund house who have started benchmarking its schemes against TRI, DSP BlackRock Mutual Fund has recently started this practice.
Jimmy Patel, CEO, Quantum Mutual Fund told Cafemutual that his fund house is following the practice of disclosing the performance of all active schemes since its inception. He explained to Cafemutual that the NAV of a scheme includes income from dividends; however, the index, which the scheme follow to measure its performance do not capture gain from dividends. The traditional benchmarks just reflect mark to market gains or capital gains, he adds.
Citing an example, he says that 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%.
Value Research data shows that large cap schemes have outperformed Nifty 50 by 3% and 2.3% 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 1.5% and 1% in three and five years respectively.
In fact, in an email interview with Cafemutual, Kalpen Parekh, DSP BlackRock said, “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 Price Return Index (PRI) or traditional benchmark. Hence, the excess performance of an equity fund over its benchmark is normally overstated if compared with PRI.”
