Mumbai: Starting February, investors in equity mutual fund schemes could see a shrinkage in performance of at least some of their investments vis-a-vis the indices they are benchmarked against. Securities and Exchange Board of India has asked all mutual funds will have to disclose performance of their schemes based on total return variant of an index(TRI). At present, most of the mutual fund schemes are benchmarked to the price return variant of an index(PRI) .
The total return variant of an index takes into account all dividends and interest payments that are generated from the basket of constituents that make up the index in addition to capital gains. PRI captures only capital gains of the index constituents
"Hence,TRI is more appropriate as a benchmark to compare the performance of mutual fund schemes,"Sebi said in circular posted on its website on Thursday.
This move could lead to gap in performance between an equity scheme and its benchmark such as the Sensex and the Nifty shrinking amid the ongoing global debate on actively-managed funds versus exchange traded funds (ETFs).
When mutual funds talk about the performance of their schemes, they are required to compare it with a stock benchmark, which could be Sensex or Nifty or
BSE 200 among others.
"The typical dividend yields on our benchmarks is in the ballpark of 1.5%. This means the Total Return Index (TRI) benchmark will be harder to beat by 150 basis points per annum," says Kaustubh Belapurkar, Director (Fund Research), Morningstar India.
A study done by Morningstar India in September 2017 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. Over a five-year period, it showed the Total Return of the S&P BSE 100 is 165 basis points higher than the Price Return. The study showed the number of funds beating their benchmark declined from 85% to 58%, when compared with the Total Return Index (TRI) vis a vis he Price Return Index
Once mutual funds adopt the Total Returns Index model and the returns compared to the benchmark are not wide enough, investors could prompt a shift to the cheaper exchange traded funds, which are structured to mimic the returns of the benchmark. Mutual funds charge a higher fee for actively-managed schemes than ETFs for churning higher returns than the benchmarks.
The regulator said mutual funds should use a composite CAGR (compound annual growth rate) figure of the performance of the PRI benchmark (till the date from which TRI is available) and the TRI subsequently to compare the performance of their scheme in case TRI is not available for that particular period.
Quantum Mutual Fund, Edelweiss Mutual Fund and DSP Blackrock Mutual fund have already disclosed the performance of their equity mutual fund schemes against the total return index (TRI) of their respective benchmarks.