Saturday, January 20, 2018

Mutual fund to adopt returns on total return basis

SEBI has asked mutual fund companies to benchmark scheme’s performance to Total Return Index (TRI)

  • Mutual fund to adopt returns on total return basis

By Himali Patel

Investor often receive an advertisement from mutual fund companies, claiming how their particular scheme performance has outperformed its benchmark index and has delivered a superior return. However it is no-brainer that evaluating or comparing the performance of the scheme with their respective benchmark index can help investors understand till what extent such claims are true.

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In a quest to enable the investors to evaluate the performance of a scheme against an appropriate benchmark, the Securities and Exchange Board of India (SEBI) has asked AMC’s to compare their scheme performances with the Total Return Index (TPI) of the benchmark. “Mutual  Funds  are  required  to  disclose  the name(s)  of benchmark index/indices  with  which the AMC and trustees would compare the performance of the scheme in scheme related documents,” SEBI said in a circular issued on 4th January, 2018.

The decision has been taken after realising the importance of how selection of benchmark index can be an important medium that investors can use to evaluate the scheme’s performance. Benchmark indices are closely connected to the nature of the scheme. Hence the selection of a benchmark for the scheme of a mutual fund should be mapped with the investment objective, asset allocation pattern and investment strategy of the scheme, the regulator emphasised.


Presently as per the regulation, the mutual fund has to evaluate its performance on the basis of a define benchmark.  One of the widely followed benchmarks in India is BSE Sensex and NSE Nifty.  Other benchmarks such as BSE Midcap, CNX midcap, CNX smallcap etc are extensively followed. So for instance if an investor invest his money in an equity fund that is benchmarked against BSE 200, its return would be compared with that of BSE 200. Further, most of the mutual fund schemes currently are benchmarked to the Price Return variant of an Index (PRI), apart from debt schemes.


The issue with benchmarking to the PRI is that it only captures capital gains of the index constituents. Whereas Total return variant (TPI) along with price returns also captures dividends of the stocks that comprises an index. “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,” says SEBI circular.


Mutual fund companies like DSP Blackrock Mutual fund, Quantum Mutual Fund and Edelweiss Mutual Fund are already disclosing their actively-managed equity schemes to the Total Return Index (TRI). The circular would come into force with effect from February 1, 2018, the regulator noted. All in all, with the implementation of this move, investors would know who the alpha of the fund is clearly.