Understanding Total Returns Index (TRI) in Mutual Funds
When it comes to mutual funds, a benchmark serves as an indicator used for assessing the performance of a mutual fund. A comparison of benchmark’s performance with the fund’s performance will help the investor understand how the fund has performed.
Any equity/debt index comes in two different variants - Price Returns Index (PRI) and Total Return Index (TRI). When you invest in a mutual fund scheme, the returns are generated in two forms - capital appreciation from the price movements of the underlying assets, dividends/interest payments obtained from the underlying assets.
Difference between Price Return Index (PRI) and Total Return Index (TRI)
In case of a PRI, the index only captures the price movements of the underlying stocks and excludes any dividends obtained from them. PRI only captures capital gains of the index constituents.
In case of a TRI, the index captures both the price movements and the dividends of the underlying stocks. The Total Return variant of an Index (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.
With an objective to enable the investors to compare the performance of a scheme with an appropriate benchmark, SEBI mandated that all mutual fund schemes must use the Total Returns Index (TRI) as the benchmarks. Also, the selection of the benchmark for the scheme of a mutual fund is made in alignment with the investment objective, asset allocation pattern and investment strategy of the scheme.
What does the Total Returns Index (TRI) mean for the investors?
Let us consider a mutual fund scheme that delivered 8% returns in a particular calendar year. If the underlying benchmark is based on its price return and delivered 7% returns, it can be considered that the mutual fund scheme has outperformed its benchmark.
But as the index calculation is based on its price alone, dividends were not taken into consideration. If we take the dividends also at 1.5%, the returns generated by the underlying index of the scheme is 8.5%. This is because the dividends received by the mutual fund schemes is also reinvested and thus, the mutual fund scheme actually under performed against the index.
So, the Total Returns Index (TRI) considers both the (capital appreciation + dividends) that may provide more accuracy for investors to analyze the performance of the mutual fund schemes.
Conclusion:
By including both price appreciation and dividends, the TRI may provide a more complete and accurate picture of an index's performance or scheme’s performance. This allows investors to make more informed comparisons between a mutual fund scheme's returns and its benchmark. The TRI's comprehensive nature eliminates the potential for misinterpreting performance due to the exclusion of dividend income, as illustrated by the example. Ultimately, the TRI enhances transparency and empowers investors to assess mutual fund scheme performance more effectively.
Disclaimer - Please note that this article or document has been prepared on the basis of internal data/ publicly available information and other sources believed to be reliable. The information contained in this article or document is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party in any manner. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article or document.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Published in Feb 26th, 2025
