What is Total Return Index

current affairs, economy

2 October 2017
In August, asset management firm DSP BlackRock Investment Managers Pvt. Ltd.
announced it would be disclosing the performance of its active equity mutual funds
with The Total Return Index (TRI) as the benchmark. Here is a rundown of the term

How has equity mutual fund performance been measured so far in India
Currently, a majority of fund houses benchmark their equity mutual fund schemes
against simple price indices which capture only the change in price of the stocks
that are components of the said index.

An index comprises a basket of securities taken at the prevalent market price. For
instance, two of India�s popular indices Sensex and Nifty comprise shares of 30
companies and 50 companies respectively and the returns are measured based on price
movements of the index components. So, an equity mutual fund�s performance was
measured against the performance of their respective benchmarks.

What is The Total Return Index

A Total Return Index takes into account not just the Price Returns of the stocks
but also dividends paid out on the stocks.

According to investment research and investment management firm Morningstar,

globally, Total Returns Indices are commonly used as the primary benchmarks for
comparing fund performance, but in India this trend is only now taking off.
Historically, Indian indices have always been tracked for the Price Return, but now
you can find historical Total Returns data for most indices, although they are not
widely tracked yet, the firm said.

What is the advantage in using the Total Return Index

BlackRock has said that total returns included interest, capital gains, dividends
and distributions realised over a given period of time.

The TRI will help in giving the right picture of the real alpha (a metric which
measures what the fund has earned over and above � or below � what was expected.

The alpha that is shown currently may look overstated as dividends are not added in
benchmark returns calculation and the move towards TRI is a step towards
�responsible and transparent communication with our advisors and investors and also
sets high standards in investment management,� BlackRock said.

Morningstar has compared the alpha generated by Large Cap Funds against the broader
market benchmark on both Price Return as well as Total Return basis for a 5-year
period.

According to the firm, the Total Return of the benchmark S&P BSE 100 was 165 basis
points higher than the price return.

The number of equity mutual funds beating the benchmark dropped to 58% from 85%
after making a comparison on TRI rather than on Price Return Index basis, it said.

What does TRI mean for stakeholders in a mutual fund

From an investor stand point, TRI would give the actual picture of what exactly he
or she earns from a mutual fund investment. From the standpoint of fund managers,
it will make them work a little harder to make the right stock pick.

For instance, according to Morningstar, the typical dividend yield on benchmarks is

in the ballpark of 1.5% per annum, which means that the TRI benchmark will be
harder to beat by 150 basis points per annum.
One has to wait and see how the TRI changes the working style of fund managers and
their performance in India.