SEBI has changed benchmarking of Mutual Fund Scheme’s performance to Total Return Index – What is TRI?

After all all of our investments are for the wealth creation which occurs in terms of the returns which we get from the investments made. With effect from 1 February 2018 SEBI has changed the norms of benchmarking of mutual funds based on the Total Return Index (TRI) vide SEBI Circular Number SEBI/HO/IMD/DF3/CIR/P/2018/04 instead of the Price Return Index (PRI)

What is Bench marking of Mutual Funds?

A benchmark is a standard against which the performance of a security, mutual fund or investment manager can be measured. You can easily find the benchmarking details of the mutual funds by visiting any of the websites like below are steps for the moneycontrol 
  1. Visit 
  2. Got to mutual fund section
  3. Perform ‘search’ for the concerned MF scheme
  4. Click on ‘Overview’ section under ‘Investment info’ of a MF Scheme
you'll get the benchmarking details of any mutual funds. 

Price Return Index or PRI considers price movements (capital gains or losses)of all the securities (stocks/bonds) that make up the index which is going to change in Total Return Index or TRI

What is Total Return Index?

A total return index is an index that measures the performance of an Index (Benchmark) by assuming that all cash distributions are reinvested, in addition to tracking the components’ price movements.

this makes a total return index (TRI) different from a price return index. We can see that a price index only considers price movements (capital gains or losses) does not consider the returns arising from dividend receipts of the securities that make up the index, while a total return index includes dividends, interest, rights offerings and other distributions realized over a given period of time.

The Total Return Index can provide the more clear picture about the returns of the mutual fund rather than that of existing Price Return Index as it also considers the dividends received from the constituent stocks while factoring in the index values. 

We can see how calculations of the return on investment for any mutual fund will now change with effect of SEBI's new norms

  • The performance of the schemes of a mutual fund shall be benchmarked to the Total Return variant of the Index chosen as a benchmark w.e.f 1st Feb, 2018.
  • Selection of a benchmark for the scheme of a mutual fund shall be in alignment with the investment objective, asset allocation pattern and investment strategy of the scheme.
  • Mutual funds shall use a composite CAGR figure of the performance of the PRI benchmark (till the date from which TRI is available) and the TRI (subsequently) to compare the performance of their scheme, in case TRI is not available for that particular period(s). The calculation of a composite benchmark performance return in CAGR terms would be as given below:
  • The calculation of composite CAGR is elaborated with an example as below;
  • For instance, ABC scheme had been launched on August 2, 1995. The benchmark PRI values are available from the date of inception of the fund. The benchmark TRI values are available from June 30, 1999. 
  • Thus, in the above example (for advertisements in the month of December, 2017 the last of the preceding month would be November 30, 2017), CAGR of Benchmark index would be 12.20%, since inception.[(1187.70/1007.57)*(13966.58/1256.38) ^ (1/22.3452)]-1
    • How did we get 12.20%? – The benchmark index value as per PRI (when TRI data is not available) is 1007.57 points. The value of this index in TRI terms as in Nov, 2017 is 13966.58 points. The CAGR comes around 12.20%.
    • So, a fund house has to use this ‘consolidated CAGR benchmark return’ in their advertisements and compare it with the Scheme’s performance.

Price Return Index Vs Total Return Index

      Considering the same benchmark index viz. S&P BSE 100 below are comparative points 

      • The CAGR returns of S&P BSE 100 for the last 5 year period is around 14.5%, if we consider Price Return variant of the Index,
      • When we consider Total Return Index as the basis, the consolidated CAGR of S&P BSE 100 index comes to around 16%. (Data based on 31-Aug-2017)

      Effect of Considering Total Return Index

      We've posted some of the mutual funds recommandations which have delivered more than 60% returns on the investment this return calculation can be more precise as now mutual fund will also consider all dividentds and/or interest it received while calculation. You can clearly observe that TRI returns are higher than PRI returns, as the TRI takes into account all dividends/interest payments. Hence, we can consider TRI as more appropriate and accurate benchmark to compare the performance of mutual fund schemes.
      “The number of Large-cap Equity mutual funds beating their benchmarks dropped to 58% from 85% after making a comparison on TRI rather than on Price Return Index basis” –
      Investor also can be with more clear on their return on the investment with the use of TRI, but it will definitely push harder to fund managers as it will make them work a little harder to make the right stock pick.
      You can easily find the Total Return Index of your fund from NSE India Portal 
      Hope I'm able to clear your view on Total Return Index, do comment me your views 


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