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NIFTY Total Returns Index (TRI)

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CNX Nifty closed at 8,727 on April 4. Those who track Indian stock markets closely would raise their eyebrows and quickly correct: No, Nifty closed at 6,676 on that day. However, Nifty did really close at 8,727 on that day, if one includes dividends paid out by companies that form the index. The Nifty total returns index (TRI) closed at 8,727 on April 4. It might raise another question: how does it matter? It really does as most investors and experts typically evaluate the performance of their equity portfolios or mutual fund (MF) schemes by comparing them with the movement of the respective benchmark index during the same period.


However, many experts believe that the TRI is a better yardstick to measure the performance of a fund or portfolio. Total return index is a better benchmark as it accounts for dividends in addition to the price movements. An active fund manager is expected to generate returns in addition to total return index, after accounting for the scheme expenses.


For the beginners, an equity investor is rewarded in two ways — capital appreciation and dividend. Capital appreciation is provided by the gain in stock prices. Besides, equity investors receive dividends from companies.

 

While the CNX Nifty only captures the price movement, TRI measures capital appreciation and dividends. Nifty has given a capital appreciation of 20.08%, while Nifty TRI gave 21.6% returns last year.


Most investors focus only on capital appreciation as they don't believe that dividends really make a difference in the long term. However, they can be extremely rewarding. Dividend yield hovers in the range of 1.5-2%. TRI assumes that all the dividends paid are reinvested in the same index. In the long term, the compounding leads to a widening gap between the values of price index and TRI.


However, there is a practical problem regarding using TRI as a benchmark as exchanges do not provide TRI values for all indices in the public domain free of cost. For example, National Stock Exchange (NSE) website offers TRI values for only one index — CNX Nifty. MFs are also not keen to set high benchmark for their schemes in the form of TRI indices. Keep aside Quantum MF that uses BSE Sensex TRI for its flagship scheme, Quantum Long Term Equity Fund, but most MFs use price index as the scheme benchmark. When a scheme holds stocks, it receives dividends paid by the companies in which it invests. It's appropriate to use total return index as a benchmark. Some believe that MFs are shying away from using TRI as the benchmark as it would put extra pressure on their performance.


If one sets TRI index as a benchmark for the scheme, it becomes tougher to beat it.

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