Mutual Funds & The Total Return Index

Finally, the Indian equity investment ecosystem is getting closer to getting honest. SEBI has started discussing the possibility of making the Total Return Index mandatory as benchmarks for Mutual Funds.

To know more about what exactly is a Total Return Index (TRI) and how it differs from a the normal index, more precisely termed the Price Index (PI), you can read the excellent article by Lisa Pallavi Barbora from Mint here.

The main point is that the TRI is greater than the PI and hence harder to outperform. No wonder most mutual fund managers do not like it since it makes their job so much harder.

However, the TRI is the correct comparison for a mutual fund since it incorporates the dividends received. A mutual fund too receives the dividends paid by its investee companies.

Once this is implemented properly, it will bust the myth that Indian mutual fund managers outperform the markets. Even now this data is available but it is not popularized.

Go and have a look at the SPIVA studies by S&P. The latest report available is for calendar year 2016. You can see it here. The report clearly shows that as a whole the mutual funds underperform the total return benchmarks. It will only get harder and harder as the fund industry becomes larger and the assets under management get larger. In fact, the larger funds are already be facing problems in terms of outperforming with the large SIP and other flows coming in steadily.

They are forced to have huge portfolios which are not that different from the market portfolio and also forced to buy stocks which are already overvalued. This situation is making it difficult even for the good mutual fund managers to outperform.

Currently, the solution is to hold a relatively more concentrated (20–30 stocks) direct equity portfolio of, as we like to say it at OmniScience Capital, SuperNormal Companies at SuperNormal Prices.

Fortunately, one can do that. It is available not only to HNWI clients, but even others who typically would have invested in Mutual Funds.

Disclaimer:

Past performance is not necessarily indicative of future results.

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