Total Return Index Vs Price Return Index : How Do The Two Differ?

27 June 2023
3 min read
Total Return Index Vs Price Return Index : How Do The Two Differ?
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Post SEBI's update regarding the benchmarking of mutual funds and measuring their performance, the benchmark has shifted from Price Return Index to Total Return Index. The process has shifted since February 2018 and has brought about a lot of transparency.

With PRI focusing only either on the capital gain or loss leaving aside the dividends, TRI in Mutual Funds ensures a holistic picture of the fund in the process of comparing and benchmarking. Let us see what they are and how they differ in detail.

Understanding Benchmarking

The process of comparing and analyzing a mutual fund against the market indices which are the prevailing market securities is called benchmarking. A Benchmark is also called an index and in value equals the sum of its components. The price changes with respect to each other i.e., when the sum of components changes, the benchmark price also changes. 

It serves as a reference point for mapping the performance of a fund and a fund is called to be an outperforming fund if it shows a better performance than its reference point or benchmark. On the other hand, if the fund performs poorly and is below the set benchmark, then it is called an underperforming fund.

Total Return Index Vs Price Return Index

When you invest in Mutual Munds, the returns are generated in two ways: Capital Appreciation and Dividends. Capital Appreciation refers to the increase in the share price of the fund as compared to the price it was at when you invested.

Especially equities rely on both capital appreciation and dividend pay-out. But until February 2018, only capital appreciation was used to map the performance of a fund.

The Price Return Index parameter only took into consideration the capital appreciation aspect which is only half the story. Reinvested dividends play a major role in equities since they are invested over the longer term.

When these dividends are paid out, it increases the overall return of Equities hence ranging much higher than the benchmark. The total return index is one such index that takes into consideration the overall factors while mapping the performance of a fund.

With the introduction of TRI, the transparency and credibility of funds have increased Multi-Fold. If you compare two identical portfolios of securities then you will find that the one measured on TRI will always show greater returns than the one mapped over the Price return index.

Using PRI used to be misleading due to overstating the performance of a mutual fund which made more people invest in the funds owing to exceptional performance. Using TRI has brought the scenario to a more credible one where the overall picture is taken into consideration and actual statistics have reflected the investors.

Price Return vs Total Return - What Does It Mean to You as An Investor?

It is very important for you as an investor to know the actual scenario of market pricing and where your investments stand in this mapping. Upon the implementation of TRI, there have been a lot of cases where the previously overperforming fund is now underperforming due to the change in parameters, exposing the reality. This will also affect your style of investing i.e. Active or Passive.

Conventionally when PRI was used as the measuring parameter, a large number of funds outperformed their benchmarks but as and when the AUM grew for them, their return shirked and performance saw a downward curve. In crux, the alpha of those funds started decreasing bringing down the overall returns.

Conclusion

Finally, if you observe that your previously outperforming fund is now underperforming, you must review your investment portfolio and purge out consistently underperforming funds. Make sure your portfolio is balanced and aligned perfectly with your goals.

Happy Investing!

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. Groww Invest Tech Pvt. Ltd. (Formerly known as Nextbillion Technology Pvt. Ltd) Ltd. do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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