When we talk about investment, returns is the most important part for the investors. There is no difference in mutual fund investment. The important part is that to short list best and correct mutual funds schemes is the previous performance of the MFs.
When we look at the previous performance of Mutual fund scheme, we also looked at the differences by matching its performance with the peers. According to the category of the fund the average return and the benchmark index is calculated.
Here we a can look at the bluechip fund of SBI as an example:
- Comparison of performance Peers vs Fund
- Average category return vs bench mark vs fund
- The bench mark index of Bluechip fund of SBI is S$P BSE 100.
Methods to know the Mutual fund Bench mark index:
Visit the mutual fund section of the website named as moneycontrol.com. there is a search option where you can search for a specific mutual fund scheme. Then go to the overview option near the investment info of the mutual funds.
Now let us discuss about the Total return index.
As mentioned above the MF investment the performance have to be compared with the performance of the MF benchmark index. As you know that the return of the benchmark is generated on terms of price return index.
What is PRI (Price Return Index)?
To develop up the index a price return index is done to make the changes of all the securities.
Take for example the sbi bluechip mf manager will take the stocks that are the primary part of S&P BSE 100 index. On the leading 100 stocks the investor might not invest money. The fund of SBI bluechip is same as the 100 index of BSE.
From now many MF companies has PRI to check the comparison between the performance of the schemes with the particular benchmark indexes.
Initializing the scheme from February 1st 2018, the SEBI has asked each and every mutual funds to implement Total Return Index according to the performance of the schemes in the Benchmark index.
What is Total Return Index?
It calculates the performance of a benchmark by knowing that all the funds are reinvested. The price changes are tracked through this .
There is a difference between total return index and price return index. The security that decvelops the index for price changes is known as price index whereas in the total index return has interest, dividends, right offerings and other things depending over the time given.
The dividend receipts that arises is not considered by the price index. As in dictated by the price index only the capital profits come up due to the change in price. For a correct image of the return, the received dividends for the stock constituent have to be factored with the value of the index. Those index that has received dividends is known as the Total return value.
By seeing the index of total return is always known as more correct performance measure. Hence the TRI is more correct to the benchmark compared to the mutual fund scheme performance.
The newly formed norms for SEBI are as follows:
- The mutual fund scheme performance must be benchmarked to the variant of the total return.
- Investment object must have a alignment with the mutual fund scheme for the selection of the benchmark.
- A composite CAGR figure is the performance of the PRI benchmark. And then compare to the scheme performance, just in case the unavailability of the pri in that needed time.