Benchmarking performance: Ranks of mutual funds laggards rise with new TRI benchmark

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Mumbai | Published: January 16, 2018 4:29:33 AM

The TRI takes into account not just the capital gains but also dividend income, hence it determines an investment's real growth over time, and is seen as a superior benchmark when compared with the PRI.

The move by the Securities & Exchange Board of India (Sebi), announced on January 4, asking mutual funds to benchmark their performance against the Total Return Index (TRI), as against the Price Return Index (PRI) earlier, can have a significant impact on how the performance of mutual fund schemes are perceived.

The move by the Securities & Exchange Board of India (Sebi), announced on January 4, asking mutual funds to benchmark their performance against the Total Return Index (TRI), as against the Price Return Index (PRI) earlier, can have a significant impact on how the performance of mutual fund schemes are perceived. The TRI takes into account not just the capital gains but also dividend income, hence it determines an investment’s real growth over time, and is seen as a superior benchmark when compared with the PRI. As the TRI yield will always be higher than that of the PRI, schemes that were just about beating the PRI may well fall short of the TRI level. In the last one year, the percentage of large-cap funds beating Nifty PRI was 70%, whereas the percentage of large-cap funds beating Nifty TRI was only 38%, data from Value Research showed. Morningstar also compared the alpha generated by large cap funds over the broader market benchmark, both on a price return as well as a total return basis, and found that the number of funds beating the benchmark dropped from 85% to 58% on making a comparison with the TRI instead of the PRI. Within the large-cap segment, funds that outperformed the PRI but couldn’t beat the TRI were ICICI Pru Focused Bluechip Equity, Motilal Oswal Most Focused 25, HDFC Top 200 and Principal Large Cap.

In the midcap funds group, BNP Paribas Midcap was a fund that outperformed the PRI but underperformed the TRI. Among Flexicap funds, Templeton India Growth, Franklin India High Growth, Aditya BSL Special Situations, IDFC Classic Equity, SBI Magnum Multicap, DHFL Pramerica Diverse Equity and Sundaram Equity Multiplier failed to meet the TRI returns, even though they had delivered more than the PRI.

Additionally, Equity Linked Saving Schemes (ELSS), Axis Long Term Equity, LIC Mutual Fund Tax, Baroda Pioneer ELSS 96, DSP BlackRock Tax Saver, Escorts Tax Plan and HDFC L/T Advantage delivered returns less than the TRI, even though they performed better than the PRI. These findings are based on data provided by Morningstar for calendar 2017. Market participants say that the alpha could decline once the industry shifts to comparing its funds with the total return index. Nilesh Shah, MD of Kotak Mahindra Asset Management Company argued that this will not necessarily have an impact on alpha generation capacity of fund managers. “At some point of time long short funds could be launched. We have to develop ability to invest into offshore markets, that will allow fund managers to diversify outside India and generate alpha,” he added.

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