What Is TRI (Total Return Index) in Mutual Funds?

The index numbers you hear on the news, like the Nifty or Sensex level, are price indices. They track only the share prices of the companies in the index.

But companies also pay dividends. When a company pays one, its share price often dips by roughly that amount. A price index records the dip but ignores the dividend. A total return index adds the dividend back, as if it were reinvested in the index. Our page on Nifty and Sensex explains how indices are built.

An equity fund receives dividends from the companies it holds, and in a growth option those dividends stay in the fund and add to the NAV. So the fund total return includes dividends.

If you compared that fund with a price index, which ignores dividends, the fund would look better than it really is. Comparing with TRI is like with like.

To make comparisons fair, SEBI requires mutual funds to show their performance against the total return variant of their benchmark index. That is why fact sheets and advertisements mention TRI.

Our page on the mutual fund benchmark explains how benchmarks are chosen for each category.

Imagine two runners. One runs the race. The other runs the same race but is also given a small push every few minutes. The second runner will finish ahead.

The price index is the first runner. The TRI is the second, with dividends as the small pushes. A fund should be compared with the second runner, because it gets the same pushes.

The gap between a price index and its TRI depends on how much the companies in the index pay as dividends. Over one year, it may look small. Over many years, it builds up, because reinvested dividends also grow.

That is why comparing a long-term fund return with a price index can be misleading. Our page on compounding explains how small additions grow over time.

An index fund tries to match its index. The right comparison is with the TRI, since the fund receives dividends too. The small shortfall between the fund and the TRI comes from costs and tracking differences.

Our pages on index funds and tracking error explain how to judge an index fund.

An active fund tries to do better than its benchmark. If it cannot beat the TRI over long periods, after costs, a low-cost index fund may have done the same job more cheaply.

This is the heart of the debate in our page on active versus passive funds. Our page on alpha and beta explains how outperformance is measured.

Fund fact sheets show the fund return alongside its benchmark TRI over several periods. Index providers also publish TRI values on their websites.

Our page on the fact sheet explains where to look and how to read the table.

Fact sheets often show returns for both direct and regular plans. The regular plan has a higher expense ratio, so it will usually show a slightly lower return. Compare the plan you actually hold with the TRI.

Our page on direct versus regular plans explains the difference.

Debt indices already include interest income, so they are naturally total return indices. Hybrid fund benchmarks combine equity and debt indices, and the equity part uses the TRI version.

A fund can trail its TRI in one year and beat it in the next. Look at three, five and ten years, and at rolling returns, to see whether a fund adds value consistently.

Short-term results are noisy. Our page on how to choose a mutual fund explains a fuller set of checks.

• "The Nifty went up, so my fund should match it." Compare with the TRI, and with the right benchmark for your fund category.
• "My fund beat the index." Check whether it beat the TRI, not just the price index.
• "TRI is a fund I can buy." It is an index, a yardstick. Index funds try to track it.

Suppose an index starts at 100. Over a year, share prices rise and the price index ends at 110. During the same year, the companies in the index paid dividends worth 1.5 points. The TRI would end a little above 111.5, because the dividends were added back and also grew with the market for part of the year.

Now suppose a fund in the same space, also starting at 100, ends the year at 111. Against the price index, it looks like it beat the market. Against the TRI, it actually trailed slightly. These numbers are only for illustration, not a forecast, but they show why the TRI comparison matters.

Before the TRI rule, many funds compared themselves with the price index, which made their record look better than it was. If you read older articles or brochures, check which version of the index they used.

Today, fact sheets show the TRI, so the comparison is fairer. Our page on how to track your portfolio explains how to use this when reviewing your own funds.

• TRI includes dividends; a price index does not.
• Funds must compare themselves with the TRI benchmark.
• TRI is the fairer yardstick for judging any equity fund.
• Look at long periods before drawing conclusions.

We are distributors rather than investment advisers and we recommend no schemes. If you want help comparing your funds with their benchmarks, get in touch.