Difference between Total Return Index VS Price Return Index

In 2018, the Securities Exchange Board of India (SEBI) instructed fund houses to change the method used for measuring mutual fund scheme performance. The Price Return Index (PRI), commonly used by all schemes, except debt mutual funds, was replaced with the Total Return Index (TRI) to provide investors with a more accurate picture of the overall scheme performance.What do these indexes mean? What are the biggest Total Return Index vs Price Return Index differences? Take a look-

An index or a benchmark is a combination of securities purchased at the market price. The sum of the price of all the securities included in an index help determine its value. So, the value of the index changes every time the price of its components fluctuates.For instance, Nifty50 is an equity index representing the weighted average of 50 large-cap stocks listed on the National Stock Exchange (NSE). On a typical trading day, you can see the value of the Nifty50 fluctuating as per the movements in the price of these 50 stocks.In the world of mutual funds , the indexes function as a reference point against which you can compare a scheme's performance.If the returns generated by a scheme are higher than its benchmark index, the scheme is said to have outperformed the index. Similarly, if the returns are lower than the index, it is considered that the scheme has under performed against its index.

Also Read: What are Mutual Funds? How it Works, Meaning, Benefits & Types

Now that you have a brief understanding of what an index is, let us quickly go through the meaning of PRI and TRI-

• Price Return Index (PRI) The PRI is an index that measures the rate of return from an investment, where the measurement only relies on capital appreciation. Income generated by the assets in the form of dividends or interest is not considered when measuring the price return index.SEBI noted that measuring mutual fund scheme performance with PRI can be misleading as it does not provide a complete picture to the investors. For instance, let us consider an equity index that has appreciated by 10% in 2021. However, the investors also received an average dividend yield of 2%.But the PRI will not consider the dividend yield as it is calculated only based on capital appreciation. So, the returns generated by the index would be quoted as 10%.
• Total Return Index (TRI) The TRI tracks capital appreciation as well as cash distributions such as dividends and interest. In comparison to PRI, TRI more transparently reflects the returns generated by an investor by holding their investment.If we take the same example from above, the TRI will be 12% as it will consider capital appreciation along with the dividends. The improved transparency with TRI has encouraged SEBI to make it the mandatory index for comparing scheme performance.

Here are the biggest differences between Total Return Index vs Price Return Index-

As SEBI only made TRI mandatory in 2018, most of the older schemes do not have TRI data since their inception.For such cases, fund houses are instructed to calculate a composite CAGR (Compound Annual Growth Rate) which takes into consideration the PRI benchmark (up to the date from when TRI data is available) and TRI benchmark (from when the TRI data is available).For instance, if a scheme was launched in 1998, but the TRI data was only available from 2005, the PRI data from 1998 to 2005 will be used along with the TRI data from 2005 and beyond to calculate the composite CAGR.

The switch from PRI to TRI has made it easier for investors to analyze the performance of a mutual fund scheme. Here’s an example to help you understand how-Let us consider a mutual fund scheme that delivered 7% returns in a said year. Its underlying benchmark is calculated based on its price return and delivered 6.5% returns. In this scenario, it can be considered that the mutual fund scheme has outperformed its benchmark.But as the index calculation is based on its price alone, cash distribution was not taken into consideration. If we take the distribution yield even at 1.5%, the returns generated by the underlying index of the scheme is 8%. Thus, the fund actually under performed against the index.So, the total returns (capital appreciation + cash distribution) method adds more accuracy to these calculations and allows investors to analyze fund performance accurately.

A savvy mutual fund investor rigorously tracks such updates and analyzes their impact on the portfolio. If your previously outperforming mutual fund is under performing against the benchmark or the level of out performance has reduced, it might be due to this switch from PRI to TRI.Now that you understand the Total Return Index vs Price Return Index differences, you are one step closer to becoming a savvy investor and analyzing mutual fund schemes with improved accuracy. You can build an investment portfolio on your own or consider professional advice to achieve your financial objectives through mutual funds successfully.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.