Total returns index or TRI decoded

By Rajesh Krishnamoorthy

DSP BlackRock Mutual Fund has decided to benchmark its funds against the TRI on Wednesday. What does it mean to investors?

Most of us have grown up listening to “an apple a day keeps the doctor away!” And many of us would remember our childhood where we insisted that the apple was served to us without the skin. Peeling the apple was non-negotiable and mommy dear had to yield to her beloved child!


As we grow up, we are told that peeling the apple skin takes away a key constituent of the fruit – the dietary fiber. A simple internet search or a chat with diet-minded friends or nutrition experts will reveal that a generally available mid-sized apple will give you about 4.4 grams of dietary fiber whereas one with the skin peeled off will give you just 2.1 grams. Mommy dear has finally managed to get her beloved child to eat an apple with its skin.

There is something similar that is taking place in the mutual fund industry. By regulation, it is required that any mutual fund has to define a benchmark against which its performance will be evaluated. These benchmarks have been one from the well-known indices like the NSE Nifty or the BSE Sensex and so on. Fund managers are happy if they can outperform the benchmark index and investors tend to question them a lot if the performance is below such a benchmark.

However, most investors don’t realize that the index performance that we read on TV screens every day or on newspapers are like apples without the skin! In other words, the index merely shows movements in price. What if the many stocks that comprise that index have been giving dividends? What happens when such returns are not getting captured?

It just means that if you have to calculate how much was an index’s performance over time (eat the full apple), ideally, you should be considering both the price changes (the fruit inside the skin) and the dietary fiber in the skin too! It should be in totality! This brings us to the new way of asking index performance – ask for the total returns! Quantum mutual fund used to compare its performance against the Total Returns Index (TRI) and yesterday, I read with great interest DSP BlackRock deciding to benchmark its funds against the TRI. As investors, we will be able to understand how well our funds are performing vis-à-vis the TRI. These are encouraging moves by our asset managers.

We can now start expecting that the investment industry will start embracing tougher benchmarks to evaluate their product’s performance. Over time, from two asset managers, this number will start spreading to many more asset managers, if not all. With TRI in mind, smarter products with lower costs can take shape in the form of exchange traded funds (ETFs). Many of these funds will find meaningful allocations in our financial journey, especially those whose milestones are many years farther from here.

We must all recognize that an index in itself is not a product. It represents the performance of a sample that has been selected based on certain conditions. Asset managers will create products that either track this index or will aim to beat this index. Those that aim to track the index are called passive funds and those that aim to beat the index are called active funds. With the advent of technology, we are also seeing a sort of convergence of these two circles. Somewhere in that overlap, a new category of funds are emerging – they are called smart beta funds! In all, it seems like a revolution is expected sooner than later.

The choice of benchmarks defines whether you are making meaningful comparisons of your product’s investment performance versus a benchmark. You definitely don’t want to compare oranges and apples, and now that your mommy has taught you how to eat, you definitely want to compare apples with apples in entirety, skin included! Looks like, we are bracing for healthy and wealthy living!

(Rajesh Krishnamoorthy is the Managing Director of iFAST Financial India Pvt. Ltd.)