What is the TRI Index? What is the difference between TRI and PRI benchmarks?
In 2018, the Securities and Exchange Board of India (SEBI) introduced a significant change in measuring mutual fund performance. SEBI mandated that mutual funds use the Total Return Index (TRI) instead of the Price Return Index (PRI) to provide a more precise and accurate picture of fund performance.
An index is a tool that measures how a group of stocks performs. For example, Nifty50 tracks the performance of 50 large companies listed on the stock market. The value of an index changes based on the price movements of the companies it includes. Mutual funds use these indexes to compare their performance. If a fund’s return is higher than its index, it is said to have outperformed it.
An index measures the performance of a group of stocks, and mutual funds use these indexes to compare their returns. For example, the Nifty50 tracks the performance of 50 large companies. When comparing a fund’s returns to the Nifty50 index, it has outperformed the index if the fund’s return is higher.
Price Return Index (PRI)
The Price Return Index (PRI) only considers the price change of stocks in the index. It measures how much the stock prices go up or down but ignores any dividends or interest earned from those stocks. For example, if an index rises by 10% but pays out a 2% dividend, PRI would only show the 10% price rise, not the total return, including the dividend.
Total Return Index (TRI)
The Total Return Index (TRI), on the other hand, provides a fuller picture. It considers both the capital appreciation (price changes) and any dividends or interest paid by the companies in the index. This means TRI assumes that dividends or interest are reinvested into the index. So, if an index shows a 10% rise in price and a 2% dividend, the TRI would show a total return of 12%.
Why the Switch from PRI to TRI?
The shift to TRI has dramatically impacted how we understand mutual fund performance. PRI could sometimes be misleading because it ignores dividends, an essential part of an investor’s return. With TRI, investors get a complete picture of their earnings, including both price changes and dividends.
For example, a fund might show a return of 7%, but if the PRI return is 6.5%, it could seem like the fund has outperformed the benchmark. But when you add dividends, the benchmark’s return might be 8%, meaning the fund didn’t perform as well as it seemed.
Key Differences Between PRI and TRI
| Feature | PRI (Price Return Index) | TRI (Total Return Index) |
| What it tracks | Only price changes | Price changes + dividends/interest |
| Accuracy | Less accurate | More accurate |
| Use | Used in older methods | Provides better transparency |
Conclusion
The switch to TRI ensures investors get a more realistic and transparent view of mutual fund performance. By including price changes and dividends, TRI clarifies how well an investment is performing, helping investors make more informed decisions about their investments.
Mutual Fund investments are subject to market risks. Always read the scheme-related documents carefully before investing.
