TRI or price index: which benchmark is your fund beating?

Two numbers for the same index

Every index has a price version and a total return version. They hold the same shares, but they treat dividends differently:

• Price index (the number on the news): only share prices count. Dividends paid out by the companies disappear from the figure.
• Total Return Index (TRI): assumes each dividend is reinvested in the index on the day it is paid, so it tracks the full return a shareholder would have received.

A mutual fund's NAV already includes the dividends its holdings pay. So the fair yardstick for a fund is the TRI. SEBI requires scheme benchmarks to be total return indices for this reason.

How big is the gap?

For a broad equity index, the gap is roughly the index's dividend yield, which has often been in the region of 1 to 1.5 percentage points a year. The size varies with the index and the year. Take a 1.2-point gap, which is illustrative:

On ₹1 lakh, ten years of the gap is about ₹35,000; twenty years is over ₹2.2 lakh. A small yearly difference compounds into a large one, the same reasoning as in the impact of 1 percent.

Where it bites

• "Fund beat the Nifty." If the Nifty figure quoted is the price index, a fund that edges ahead of it may in fact trail the TRI. Compare like with like.
• Index funds. An index fund should be judged against the TRI; its gap to that is its tracking difference, which includes the expense ratio. See index fund tracking error and Nifty 50 index funds compared.
• Active fund claims. An active fund must beat the TRI by more than its extra cost to be worth it: active vs passive over the long run.

What to check on a fund's page

1. Which index is named as the benchmark, and whether it is the TRI.
2. The fund's return against that TRI over 3, 5 and 10 years, not one lucky year.
3. How often it beats the benchmark across rolling periods rather than a single start date; our post on rolling vs trailing returns shows how much the start date changes the answer.

You can look at Nifty 50 returns for any period with the Nifty 50 returns calculator.

This post is educational, not financial advice. The 12% and 13.2% rates are illustrative, not forecasts; actual dividend yields vary by index and over time. Past returns do not predict future returns.