The Securities and Exchange Board of India on Thursday asked mutual fund schemes to compare their performance with the Total Return Index of the benchmark.
At present, most mutual fund schemes (other than debt schemes) are benchmarked to the Price Return variant of an Index (PRI), which only captures capital gains of the index constituents.
On the other hand, the 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,” said a SEBI circular.
With the objective of enabling investors to compare the performance of a scheme vis-a-vis an appropriate benchmark, SEBI has decided that selection of a benchmark for the MF scheme should be in alignment with the investment objective, asset allocation pattern and investment strategy of the product, the circular added.
According to Kaustubh Belapurkar, Director — Manager Research, Morningstar Investment Adviser India, “Benchmarking against the TRI is a positive move as it represents the true alpha being generated through active management.”
This will increase the transparency of fund managers and hence the schemes, he added.
A recent Morningstar study (on a five-year basis) found that annual TRI of the S&P BSE-100 is 165 bps higher than the PRI.
The number of large-cap funds beating the benchmark drops to 58 per cent from 85 per cent on making a comparison with the TRI instead of the PRI, the study (up to August 31, 2017) revealed.
Mutual funds should use a composite CAGR of the performance of the PRI benchmark (till the date from which the TRI is available) and the Total Return Index (subsequently) to compare the performance of their scheme in case TRI is not available for that particular period(s), SEBI circular added. The new norms will be applicable to all schemes of mutual funds with effect from February 1.