Why Total Return Index is not chosen as a Benchmark

Most of the Index Funds and also Diverified Equity Funds choose Common Indices like Sensex, Nifty, BSE-200, S&P-500, CNX-MidCap, etc. In case of Index Funds, the index chosen is simply the index it attempts to replicate. In case of Diversified Funds, the index chosen represents the scope of companies (blue-chip or mid-cap, etc.) they intend to pick from while aiming to beat the Index. In case of Sector Funds, the index chosen is usually a Sectoral Index, like CNX-IT Index.

The interesting part is that majority of the Offer Docs, KIMs & Fact Sheets specify the benchmark index as Nifty instead of Nifty-TRI (you can subsitute Nifty for Sensex or other Index). The latter represents "Total Return Index" - which assumes that the Dividends received are reinvested in the Index. Considering that the Dividend Yield of Nifty is about 1.6% (for last 8 years, ranging between 1% to 3%), the growth in Total Return Index is expected to lead the growth in Index by the similar margin. Picture this - if your fund beats the Index by 5%, it has actually beaten the Total Return Index by 3.4% (or 2%, depending on the dividend yield for the period) & suddenly the fund manager appears a little less of a hero.

The facts are simple - any teenager can invest in the index stocks, capture the index yield of 2%, deduct expense ratio of 1% and still show that he beat the index by 1%. This is not an illusion, but a grand larceny perpetrated by the fund houses and sadly abetted by regulators. Next time your agent compares the return of his favorite pick with benchmark, ask him/her if the benchmark is a Total Return Index or not. If not, ask him/her to explain why not, and how does the performance compare when TRI is used. Chances are that your agent will run away, but if you start hearing explanations you do not understand, perhaps you should run away.

Till date, I have seen only one Diversified Fund - Quantum Long Term Equity Fund - that has chosen BSE-30-TRI as the benchmark. Other fund Offer Docs mention that they attempt to beat the total return of the index, but they do not mean TRI, as is shown in the fact sheets.

The worse part of the story is that while the regular index values are published widely and are available on net or other publications, the TRI values are not available on net, not even on the stock exhange houses which compute the indices. Good luck trying to be an informed consumer.