Sebi: Link MFs to total return index

MUMBAI: The latest guideline issued by Sebi asking mutual funds to benchmark their schemes against total return index would give investors a better picture about the actual performance of the scheme before making an investment decision. 

At present, most of the mutual fund schemes are benchmarked to the Price Return variant of an Index (PRI), which captures only the capital gains of the index constituents. On the other hand, 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. 

According to Morningstar Investment, a mutual fund research firm, making a comparison with the TRI paints a fair and complete picture of the alpha being generated through active management, so that investors can take a judicious call while making their investments. 

Alpha is the excess return of the investment relative to the return of the benchmark index. 

When benchmarked to the TRI, the number of funds outperforming the benchmark would significantly come down. 

On a five-year basis, Morningstar noted that the total return of the S&P BSE 100 is 165 basis points higher than the price return. 

The number of funds beating benchmark drops from 85 per cent to 58 per cent after making a comparison with the TRI instead of the PRI.   

“This move helps investors gauge the true alpha being generated by active management,” said Kaustubh Belapurkar, director, fund research, Morningstar Investment Advisor. 

While India still remains an active managers market, he said the level of alpha especially in Large-Cap funds has been coming off over the years. 

“As the markets become more efficient and the fund industry assets grow, average alpha being generated is bound to come down. Thus using a Total Returns Index becomes pertinent, whereby investors can make an apples to apples comparison while evaluating fund performance,” he added.