SEBI wants MFs to benchmark equity schemes against Total Returns Index

The capital markets regulator, the Securities and Exchange Board of India, wants mutual fund houses to benchmark their equity schemes against Total Return Index (TRI), industry sources said.

According to a SEBI official, TRI will give a true picture of the performance of a scheme against its benchmark.

SEBI official was recently speaking at Association of Mutual Funds in India AGM held in Mumbai.

Currently, domestic fund managers benchmark equity schemes to simple price index, which considers the price movements of stocks that make up the index.

Recently, DSP BlackRock Mutual Fund had announced that it will be disclosing performance of its active equity mutual funds with the Total Return Index (TRI) as a benchmark. While Quantum Mutual Fund was the first fund house to start benchmarking schemes against TRI, other fund houses may follow suit very soon.

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With very few exceptions, the mutual fund industry generally showcases its performance against a benchmark. While the performance of the mutual fund scheme is a function of dividend as well as the capital gains made on investments, returns on the benchmarks are considered without any dividend income.

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Total return, when measuring performance, reflects the actual rate of return on an investment or a pool of investments over a given evaluation period.

Total return includes interest, capital gains, dividends and distributions realised over a given period of time. Hence, total return is viewed as a strong measure of an investment’s overall performance and an apt measure to reflect the true alpha created by mutual funds.

Anup Maheshwari, EVP and CIO - Equities, DSP BlackRock Investment Managers said, "Total return determines an investment’s true growth over time. It is important to evaluate any fund’s performance against its total return benchmark to get the right perspective on the fund’s relative performance."

For instance, if the scheme gets 1 percent dividend over a year period and it has outperformed its benchmark by 1.50 percent, then the extent of alpha generation is only 50 basis points and not 1 percent.

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