Most of us as mutual fund investors have kept up the lovely part truth that ‘Indexing’ does not work in India and our fund managers can beat the index by a mile. I remember in one public event – four of us on the dias were 2 fund managers who had beaten the index, the marketing head of Benchmark Mutual fund (remember?). The BM marketing head kept saying …’indexation works’ and both these fund managers said…’Subra tell him both of us have beaten…’ and I was summarizing all the talk!!!

What is a Total Return Index?

Sensex and Nifty are ‘appreciation only’ or ‘capital gains only’ indices and they ignore dividends. There is a theory that dividends do not matter (Modigiani Miller, remember folks?) and it is just the cap gains that matter. In fact the famous Motilal Oswal Wealth study ignores dividends (so they call NTPC a wealth destroyer).

The S&P 500 on the other hand is a TRI or a Total Return Index. The total return index is an equity index that tracks both the appreciation (cap gains) of a bunch of shares over time, and assumes that any cash distributions (dividends), are reinvested into the index. One can say this is a fairer way of looking at returns. The even more accurate way of looking is when you consider the dividend in each company and assume that the dividends are used to buy the shares of THAT company and not the index in aggregate, but that might make calculating even more difficult.

A total return index is surely more accurate than say just the capital gain ESPECIALLY IN THE INDIAN CONTEXT where the PSU shares which are in the index are huge dividend paymasters. The other method that does not account for dividends is missing out on 2 things – the dividend of course and far more importantly the COMPOUNDING of the dividends over say 40 years. I would love to see the TRI since 1979 – and I am convinced we will see a number in the early 20s. That is a magnificient number.

Even some of our stalwarts like Franklin India Bluechip and Hdfc Top 200 are likely to struggle with TRI as a benchmark. My hands are itchy, especially for TRI since 1979 – on the sensex!  For example, an investment may show an annual yield of 3% along with an increase in share price of 9%. The yield is a partial reflection of the growth, the total return includes both yields and the increased value of the shares to show a growth of 12%.


Fairly obviously the Indian fund managers resisted using the TRI as a benchmark. Who wants a tougher benchmark when the people are happy to see Sensex being licked by 49 out of the 84 funds?

Well DSP Blackrock has just announced that they are now going to use the TRI as an index…and I am sure that Arup Maheshwari and team now have a tougher job to do. Asset gathering is difficult, and it now got a little tougher. However, this is a good environment to try something brave I guess. One fund house run by a good friend IV Subramanian – Quantum uses TRI – as a benchmark, but they do not have assets like the biggies. But then Q is more an asset manager than a gatherer.

I am still wondering why this change of heart – voluntarily by a big fund house. When somebody chooses a tougher path, the CA in me wakes up and asks why? I did not ask them – and with a closed, hard , old inflexible mind like mine I am happy I did not ask. I usually come to my own conclusion. I have no clue why DSP Blackrock has raised the bar. However, having raised that it would be interesting to see some websites now comparing all the funds to the TRI benchmark.

Congrats DSP Blackrock. I am still wondering why………

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  1. I was also wondering about this change when i got this mail from dsp blackrock, as why they might have decided for this change without any external push.

    At same time, my respect for quantum mf goes up higher, as they have been doibg this since beginning. And i am committed to continue my investment in quantum.

  2. I have taKen ICICI Value Discovery Fund as my bench mark. I have made 25% CAGR since 2012. I have not reinvested dividends. Dividends are kept in liquid funds/ FD. The day my direct stock portfolio lags benchmark I will start investing in large cap funds.

  3. Funny…I wake up every morning checking ndtv, moneycontrol, subramoney since 2008. Every single day ( sorry…mostly…have skipped al few days/weeks altogether).

  4. I never even notice the benchmark that a fund uses and I don’t even know the available indices. I always checked the category returns from value research online for choosing a fund and index funds are always at the bottom half of large cap category. May be most large cap funds cheat by having a small mid cap bias which did very well in the last few years. But still in the absolute returns wise they lag.

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