What is Total Return Index and why is it important?

The Total Return Index (TRI) is a type of stock market index that includes not only capital gains or losses but also dividends or interest payments, if any, from its constituent securities. The Securities and Exchange Board of India in India has directed all fund houses to use TRI as benchmarks for their equity funds.

The index that was earlier used was the Price Return Index or PRI, which factors in only capital appreciation or loss while computing the index’s performance. Dividends or other payouts such as interest income, if any, are not included in the PRI.

TRI is a more accurate benchmark to compare a fund’s performance with because the mutual fund NAV is based on the price of the securities as well as dividends and interest payments.

• Table of contents

1. Understanding returns with TRI
2. Significance of TRI
3. Tips for using TRI

Understanding returns with TRI

Every mutual fund scheme has a benchmark index that can be found on the scheme information document and other fund-related disclosures. Some commonly used benchmark indices include National Stock Exchange’s Nifty indices and Bombay Stock Exchange’s S&P BSE Sensex Indices.

The benchmark index helps compare a mutual fund’s returns to the performance of the broader market. It is therefore important for the benchmark to be adequately representative of the scheme.

Significance of TRI

Consider two indices that have the exact same underlying constituents. In theory, the performance of both the indices should be similar. However, the TRI value is usually higher than the PRI. This is because the TRI includes dividend and interest payouts that are not accounted for in the PRI.

That is what makes TRI a more accurate and representative benchmark for equity mutual funds.

A mutual fund may more easily outperform PRI because the NAV of a mutual fund includes dividend/interest income, which PRI does not. TRI helps investors see more accurately whether the expense ratio and fee they are paying for investing in actively managed mutual funds are being rewarded in the form of benchmark-beating returns.

Tips for using TRI

Choose the right benchmark: Always compare a scheme only against its benchmark. For instance, different categories of mutual funds are benchmarked against different TRIs. A large cap fund may be benchmarked against the Nifty 100 TRI, whereas a flexi cap fund may be benchmarked against the S&P BSE 500 TRI. The scheme’s benchmark is mentioned in several scheme-related documents.

Beyond TRI: While TRI is important, always consider factors like expense ratio, the fund manager's track record and your own risk tolerance and objectives before making any investment decisions.

Reinvestment assumption: TRI assumes that all dividends are reinvested back into the scheme. The actual returns will differ if investors plan to withdraw their dividends payouts. A compound interest calculator can help you assess the enhanced growth potential of an investment when dividends are reinvested.

Conclusion

By understanding TRI, you can track the performance of your mutual fund investment against its relevant benchmark with greater clarity, potentially leading to more informed investment decisions.

FAQs

How many TRIs are there in India?

Different market segments and sectors have their own indices. It is important to compare the performance of a mutual fund scheme only against its relevant benchmark index.

Can TRIs help in long-term investing?

Looking at a scheme’s benchmark TRI index can help in making long-term or short-term investing decisions. Total Return Index assumes all dividends and interest payouts are reinvested back in the scheme. Looking at historical returns of the benchmark TRI over long periods can help investors visualize the significant impact of compounding returns on the portfolio over the long term. Do note, however, that past performance does not predict future returns.

What is the difference between TRI and PRI?

TRI includes reinvested dividends, offering a comprehensive measure of total returns. PRI only considers price changes in assets, excluding reinvested income. Thus, TRI reflects both capital gains and income reinvestment, while PRI reflects only capital gains.

What is the difference between TRI and ETF?

TRI and Exchange-Traded Funds or ETF investment serve different purposes. TRI is a benchmark index that tracks the total returns of an index, including dividends and capital gains. An ETF is an investment product that tries to match an index (like a TRI) and can be traded on stock exchanges. ETFs aim to deliver similar returns to their benchmark index.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.