The Total Return Index Value (TRIV) considers both the price returns as well as the dividend payouts on the stocks. It is a kind of index, which tracks the capital gains over a period and assumes that dividends, if any, are reinvested.
It is a more accurate measure to determine the performance of the investment instrument. You assume that the dividends are not paid out but reinvested in the underlying security.
You may invest in direct stocks through a share broker. However, equity investing is risky because of the high risks due to market volatility. Therefore, a less risky option, which has the potential to deliver a good return on investments, is mutual funds.
Historically, mutual funds compared the scheme’s performance against the benchmark index. However, this considered only the price value during the period and failed to account for the additional payouts in the form of dividends and interest.
Breaking down TRIV
Compared to performance measures that account only for the annual yields, TRIV is more accurate because it accounts for the dividends and other distributions. Therefore, the TRIV provides an accurate estimate of the actual alpha, which is the measure of the investment’s performance over or below the expected returns.
What is an index?
An index includes several securities at their prevailing market prices. The change in the index reflects the collective modifications in the prices of included securities. Compared to a price index, the total returns index takes into consideration the price modifications as well as dividends or interest to determine the actual returns.
A mutual fund not only offers capital appreciation but may also deliver dividends over a period. The TRIV is able to capture the actual returns delivered by the fund house. An index is the representation of the performance of the samples that are included based on certain criteria. Asset management companies (AMCs) often offer products that match the index performance or aim to outperform.
Funds that match the performance of an index are known as passive funds. On the other hand, mutual fund schemes that aim to outperform the index are referred to as active funds. Within the overlap of these two, you may now come across new schemes, which are known as beta funds.
Need for change
When you compare the performance against the TRIV, you are able to achieve greater transparency and credibility. In most instances, the TRIV is going to be higher than the price index return because the former includes additional payouts like dividends. Therefore, when you consider only the price index, the outperformance is overstated against the benchmark. Currently, equity mutual funds have significantly outperformed the index. As a result, a higher number of investors are investing in mutual funds either through a stockbroker or through other channels. Therefore, in this scenario the need for such a change is important.
How TRIV impacts investors
When you take into account the TRIV, you are able to more precisely measure the funds’ performances. However, it may not provide significant insights if you are comparing peer-group returns during a certain period to choose the best fund to invest. Nonetheless, the TRIV is a more comprehensive tool to measure the actual returns compared to the benchmark.
In several instances, the fund managers are required to meet internal targets to consistently outperform the benchmark index by a certain level. Therefore, fund managers will need to work harder to make the right investment decisions to consistently meet its internal targets. They will not be able to rely on technical discrepancies to show higher returns, which bodes well for investors like you.