Total Returns Index (TRI) – an appropriate benchmark to compare fund performance

Financial institutions have come a long way since the aftermath of Global Financial Crisis in 2008. As asset management companies and fund houses battle to grab a larger share of corpus from increasingly knowledgeable investor cohort, more and more emphasis has been laid on building customer confidence and trust, financial transparency and ethics. In a recent survey by CFA, ‘From Trust to Loyalty: A Global Survey of What Investors Want’, majority (~38%) of the retail customers chose ‘Trust on asset managers/firm’ as their primary reason while picking an asset management firm.

More recently, one such step in achieving financial transparency is a decision by DSP Blackrock Mutual Fund & Edelweiss Mutual Fund to opt for Total Returns Index (TRI) as the benchmark to measure the performance of their funds. Prior to DSP Blackrock & Edelweiss Mutual Fund, Quantum mutual fund adopted the TRI benchmarks to compare the returns of their funds. Such a move by fund houses is in the right direction towards global convergence on usage of fair and transparent benchmarks – to gauge performances of assets under management.


What is Total Returns Index (TRI)?

There are two sources of returns on equity investments: capital gains and cash dividends. The cash dividends received are typically reinvested by mutual funds to generate further returns on net assets. For instance, The PRI (Price Returns Index) version of NIFTY 50 for the year 2016 delivered a return of 3.01% and the 50 underlying stocks paid an aggregate dividend of 1.47%, thus the TRI version of the index delivered 4.48% return during the year. Historically, most of the domestic funds have used PRI, to compare their funds’ performances, which considers only capital gains (price appreciation) thus ignoring dividend returns. Total Returns Index (TRI) captures both – price appreciation and cash dividends to reflect all sources of returns in equity portfolio. The Net Asset Value (NAV) calculated by mutual funds also reflects both these sources of returns. Using TRI for fund performance comparison is thus a more appropriate, fair and prudent benchmarking practice.


Global emphasis on usage of total return index benchmarks for performance comparison

Globally, the emphasis on transparency has been on a rise as indicated by the guidelines issued by various capital market regulators. In the United States, Securities and Exchange Commission (SEC) regulations published in 1998 mandates that all funds report performances using appropriate benchmarks which consider reinvestment of dividends for index computation (read TRI). Most of the asset managers in the United States claiming a large part of the industry AUM use Total Returns (TR) indices as benchmarks to measure the performances of their funds. Below is the summary of 5 such asset managers and few of their top funds and corresponding benchmarks.


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