Total Return vs Price Return Index: Which is ideal for benchmarking your MF portfolio?


SEBI has instructed fund houses to start benchmarking the performance of all their funds with Total Return Indices, effective February 1, 2018, (or TRI) vis-à-vis the current practice of using Price Return Indices (or PRI) as benchmarks.

So, what is the difference between TRI and PRI and how important is it to benchmark fund performance to TRI?

Listed securities typically generate returns from two sources – a) capital gains or losses accruing due to appreciation or depreciation in the price of the security and b) coupons or dividend from the security.

The performance of a Price Return Index (PRI) captures only the capital gain or loss and not the coupon or dividend received from the security, whereas a Total Return Index (TRI) captures both.

Due to this, Equity Total Return Indices (such as S&P BSE 100 or S&P BSE Small & Mid cap index) show a return that is around 1.5 percent p.a. higher than PRI variants of the same index.

On the other hand, mutual fund performance includes both capital gains or losses and dividends or coupons received from securities held.

Hence, to provide an apples-to-apples comparison the performance of a mutual fund should be benchmarked against a Total Return Index.

Morningstar’s research shows that 69 percent of largecap funds outperformed the S&P BSE 100 PRI over the last five years (i.e. based on 5-year CAGR as of December 29, 2017).

When compared with the S&P BSE 100 TRI, the percentage of largecap funds outperforming the index comes down to 52 percent. Why is this comparison relevant for investors?

In case one has investments in a fund that was outperforming its benchmark based on its Price Return Index but is underperforming the Total Return Index over the medium to long-term (3 to 5 years), it would be advisable to review the performance in further detail and probably consider alternate fund options.

Going ahead, are actively managed equity mutual funds expected to continue outperforming benchmark indices. Historically, over longer time periods, such as 5 to 10 years and above, a sizeable share of equity mutual funds have outperformed benchmark indices.

But, as industry assets (or AUM) managed by actively managed equity funds as a whole grows further, the size of alpha or additional return generated over benchmark indices by these funds may start to reduce as the market becomes more efficient in terms of pricing securities, particularly in the large cap space.

As the proportion of actively managed equity funds outperforming benchmark indices drops further, one may need to start considering investments into lower-cost investment products such as ETFs and index funds that passively track benchmark indices.

This trend is being observed in developed markets such as the US, where over the last few years, the alpha being generated by actively managed funds has reduced considerably and investors are moving investments to low-cost ETFs and index funds.

In India, such a scenario is probably a few years away. Meanwhile, investors should regularly monitor & review their portfolios and compare fund performance to relevant Total Return Indices.

Disclaimer: The author is Director, Portfolio Strategist, Morningstar Investment Adviser (I) Pvt. Ltd. The views and investment tips expressed by investment experts on are their own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.moneycontrol