TRI vs price index

A friend forwarded me a fund factsheet last night. The pitch line was right at the top. Beat the Nifty by a full point a year, ten years running.

I asked him one question before the congratulations. Which Nifty.

Here is the part most people miss. The Nifty you see on TV is a price index. It tracks what the 50 stocks trade at and nothing else. Every dividend those companies have ever paid, and they pay a lot, simply vanishes from that chart. But if you actually own the stocks, or an index fund holding them, those dividends land in your account and compound. The honest bar is the TRI, the total return index, which reinvests every payout. It runs roughly 1.3 percentage points a year hotter than the TV number.

So I ran my friend's factsheet through both bars. Rs 10 lakh for ten years. The price index at 12 percent grows to about Rs 31.06 lakh. His fund at 13 percent grows to about Rs 33.95 lakh. The TRI at 13.3 percent grows to about Rs 34.86 lakh. Against the TV chart the fund is a hero, ahead by Rs 2.89 lakh. Against the bar that includes the dividends, it is Rs 0.91 lakh short. Same fund, same decade, two completely different verdicts.

The dividends alone are Rs 3.80 lakh on that cheque. Thirty eight percent of the original investment, quietly dropped on the floor by the wrong chart.

SEBI saw the trick and forced funds to benchmark against the TRI from February 2018. Which means any proud long-term comparison that starts before that date collected the dividend gap as free alpha for years.

The read is simple. Open the factsheet, find the benchmark name, look for three letters. TRI. If they are missing, add 1.3 points back and see if the applause survives.

More benchmark literacy, explained the same way: