Price Return Index

Most index numbers people quote on the news — the Sensex closing at a certain level, the Nifty rising by a certain percentage — are price return figures. A Price Return Index (PRI) tracks only how the prices of its constituents move. If the companies in the index pay dividends, the index does not notice.

That was fine for describing the market, but it created a mismatch when used to judge a mutual fund. A scheme's own performance includes the dividends and interest it earns from its holdings. Even for the IDCW option, performance is calculated as though distributions were reinvested. Comparing that against a PRI hands the scheme a small but systematic head start.

So SEBI moved the benchmark. With effect from 1 February 2018, mutual fund schemes are benchmarked to the Total Return variant of the index (TRI) instead, which counts dividends and interest in addition to capital gains. The PRI still exists — it just may no longer be a scheme's benchmark.

The only difference between the two variants is income:

The gap between the two returns is therefore the amount of dividend. Historically, the workbook notes, Indian index-level dividend yields have ranged from 1.5 to 2.5 per cent most of the time — which is roughly the annual head start a scheme used to enjoy against a PRI benchmark.

The change was made through SEBI circular SEBI/HO/IMD/DF3/CIR/P/2018/04 dated 4 January 2018. Its effect, in the workbook's words, is that it now appears fewer schemes beat their benchmarks: while the reality has not changed, the presentation of the same has changed.

Where a TRI series is not available for part of the period being measured, the fund must use a composite CAGR: the PRI benchmark until the date from which TRI is available, and TRI after that.

TRI return ≈ PRI return + dividend yield of the index

Composite benchmark growth (when TRI starts part-way):
  (1 + PRI return for the pre-TRI period)
× (1 + TRI return for the period after)

Composite CAGR = (that growth factor) ^ (1 / years) − 1

The head start. Over three years an index's price return is 10 per cent a year, and its dividend yield is 1.8 per cent — inside the workbook's 1.5–2.5 per cent range — so its total return is about 11.8 per cent. A scheme returns 11 per cent a year. Figures are illustrative.

Against the PRI the scheme is about Rs 37,000 ahead. Against the TRI it is about Rs 30,000 behind. Nothing about the scheme differs between the two rows.

The composite CAGR. A scheme's two-year track record starts before TRI data exists for its benchmark. In year 1 only the PRI is available, and it returned 12 per cent; in year 2 the TRI returned 14 per cent.

Growth of Rs 1,00,000 = 1,00,000 × 1.12 × 1.14 = Rs 1,27,680
Composite CAGR        = (1.2768) ^ (1/2) − 1  ≈ 13.00%

The scheme is compared against about 13.00 per cent a year — not against the PRI alone, and not with a gap in the record.

Chapter 11 (Mutual Fund Scheme Performance), section 11.2, is devoted to PRI versus TRI, and section 11.3 carries the mandate and the composite CAGR rule; Chapter 4 explains why TRI is the more appropriate benchmark. One of Chapter 11's learning objectives is precisely the difference between the two. Expect a definition question (what PRI captures), the effective date, what the PRI–TRI gap represents, and what to do when TRI history is missing.

• PRI captures capital gains only. Any option saying it includes dividends describes TRI.
• The gap between PRI and TRI is the dividend — historically 1.5 to 2.5 per cent at the index level in India.
• Benchmarking to PRI flattered schemes. Moving to TRI made fewer schemes appear to outperform; actual performance did not change.
• Effective 1 February 2018, by a circular dated 4 January 2018. The dates are tested separately.
• Missing TRI history → composite CAGR of PRI then TRI, not PRI throughout.
• Scheme returns are computed with distributions reinvested, even for the IDCW option — which is why PRI was unfair in the first place.