Mutual Funds to use better index to benchmark schemes
Fund houses may find it difficult to show a wide outperformance if mutual funds decide to benchmark their schemes against total return index.
Published: 08th January 2018 07:42 AM | Last Updated: 08th January 2018 07:42 AM | A+A A-
Investors in equity mutual funds may soon see a decline in performance of some of their investments vis-a-vis the indices they are benchmarked against. This is because the Securities and Exchange Board of India (Sebi) has asked mutual fund houses to adopt total return index, or TRI, to benchmark schemes.
Fund houses may find it difficult to show a wide outperformance if mutual funds decide to benchmark their schemes against TRI.
At present, most MFs other than debt schemes are benchmarked to the price return index (PRI), which only captures capital gains of the index constituents. But, TRI is considered to be a more appropriate way to measure the performance of financial products. It includes dividends and other gains in addition to the stock price movements, improving the value of the index.
Justifying the move, Sebi said, “PRI only captures capital gains of the index constituents. On the other hand, 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.
TRI is more appropriate as a benchmark to compare the performance of mutual fund schemes.” The new norms will be applicable to all schemes of mutual funds with effect from February 1, 2018.
Mutual funds are required to disclose the name of benchmark index with which the Asset Management Company and trustee compare the performance of the product in scheme related documents.
