Why did SEBI mandate that all mutual fund schemes must benchmark their performance against the Total Return variant of an Index (TRI) rather than the Price Return variant (PRI)?

[ A ]Because TRI artificially inflates scheme performance relative to the market benchmark by excluding market corrections.

[ B ]Because PRI is calculated only once every five years by stock exchanges.

[ C ]Because TRI accounts for both capital gains and dividend/interest income reinvested, ensuring fair comparison since scheme NAV includes dividends.[ CORRECT ]

[ D ]Because TRI completely eliminates market risk from the underlying benchmark index constituents.

Takeaway

Option C is correct: Because TRI accounts for both capital gains and dividend/interest income reinvested, ensuring fair comparison since scheme NAV includes dividends.

Derivation

A Price Return Index (PRI) only captures the capital appreciation of index constituents. However, mutual fund schemes receive and reinvest dividends and interest, which are factored into the scheme's NAV. Benchmarking against PRI gave mutual funds an unfair visual advantage. The Total Return Index (TRI) incorporates all cash dividends and interest payouts, assuming notional reinvestment. Benchmarking against TRI provides a fair and transparent comparison. This question tests performance disclosure integrity rules. A common error is believing TRI reduces or removes benchmark volatility.

Why the others fail

A — Because TRI artificially inflates scheme performance relative to the market benchmark by excluding market corrections.

TRI provides a stricter and fairer comparison standard rather than inflating scheme performance relative to the market.

B — Because PRI is calculated only once every five years by stock exchanges.

PRI is computed and published continuously in real-time by stock exchanges on every trading day and is not restricted to 5-year cycles.

D — Because TRI completely eliminates market risk from the underlying benchmark index constituents.

TRI reflects total economic return and does not alter or eliminate the systematic market risk of index stocks.