Skip to main content

Sebi wants MFs to adopt tougher benchmarks

The Securities and Exchange Board of India (Sebi) is evaluating the category of benchmarks being currently used to compare the returns of mutual fund (MF) schemes.
The net asset value (NAV) of MF schemes takes into account dividends for computing returns. The schemes are, however, benchmarked against “price return" indices that do not take into consideration the dividend component.
On an average, the dividend yield for Indian equities works out to 1.25-2 per cent for a year. In other words, dividend yields can add anywhere between 1.25 per cent and two per cent to the returns of MF schemes

“The NAV of schemes takes into consideration the valuation of the security as well as the dividend. So the NAV that comes out is a ‘total return’ NAV. The benchmark indices that are available are all ‘price’ indices. We need to move in a direction where there is a like-to-like comparison," said a Sebi official.
Total return benchmark indices assume that any cash distribution, such as dividend, is reinvested into the index. Comparing MF scheme returns with these indices, therefore, makes it a more equitable comparison. Globally, except derivative products, 90 per cent of MF schemes are benchmarked to total return indices, according to experts. 

“The sector should gradually move to total return indices for comparing scheme performance as it will give a more accurate picture of the fund managers’ capability and bring in more transparency," said Manoj Nagpal, chief executive officer, Outlook Asia Capital. “The returns will remain the same, but the alpha will reduce to the extent of the dividend."

According to Ravinath Dasika, co-founder at Tavaga, a robo-advisory firm, a lot of funds that are just about beating the indices by one-two per cent may suddenly fall behind the benchmark if the comparison shifts to total return indices. 

“About 70 per cent of large-cap schemes, for instance, are believed to have outperformed their benchmarks in their three-year rolling returns over a 10-year period. This figure may decline to about 25 per cent. So, over time fund managers will have to get to a lot more efficient," Dasika said. 


The impact will be more pronounced on large-cap rather than mid-cap schemes. As of March 17, large-cap schemes outperformed their respective benchmarks by 2.25 per cent and 1.48 per cent over a three-year and five-year period, respectively, data collated from Value Research show. After subtracting the 1.5 per cent dividend yield, the outperformance is reduced to 0.75 per cent for a three-year period and is wiped out completely for a five-year period. 

Mid-cap schemes outperformed their respective benchmarks by 4.6 per cent and 5.6 per cent over a three-year and five-year period, respectively. 

Their outperformance, after subtracting the 1.5 per cent dividend yield, is reduced to 3.1 per cent for a three-year period and 4.1 per cent for a five-year period.

BREAKING IT ALL DOWN


What’s the fuss all about? 


Net asset value (NAV) of MF schemes takes into account dividends for computing returns. The schemes are, however, benchmarked against indices that do not take into consideration the dividend component


And what’s NAV? 


In relation to mutual funds, NAV is the market value of a fund share. This is normally given as the bid price, which is the price at which investors in the fund can cash out their shares. The NAV 


is calculated by subtracting any liabilities the fund might have from its total assets (whose value is usually updated daily after the close of trade), then dividing by the number of outstanding shares so that the NAV is expressed on a per-share basis


So how do we make better comparisons? 

Total return benchmark indices assume that any cash distribution, such as dividend, is reinvested into the index. Comparing MF scheme returns with these indices, therefore, makes it a more equitable comparison. Globally, except derivative products, 90 per cent of MF schemes are benchmarked to total return indices, according to experts 


Impact in case of like-to-like comparisons  

The impact will be more pronounced on large-cap rather than mid-cap schemes. As of March 17, large-cap schemes outperformed their respective benchmarks by 2.25 per cent and 1.48 per cent over a three-year and five-year period, respectively, data collated from Value Research show. After subtracting the 1.5 per cent dividend yield, the outperformance is reduced to 0.75 per cent for a three-year period and is wiped out completely for a five-year period.
Business Standard New Delhi,22th March 2017

Comments

Popular posts from this blog

Credit card spending growth declines on RBI gaze, stress build-up

  Credit card spends have further slowed down to 16.6 per cent in the current financial year (FY25), following the Reserve Bank of India’s tightening of unsecured lending norms and rising delinquencies, and increased stress in the portfolio.Typically, during the festival season (September–December), credit card spends peak as several credit card-issuing banks offer discounts and cashbacks on e-commerce and other platforms. This is a reversal of trend in the past three financial years stretching to FY21 due to RBI’s restrictions.In the previous financial year (FY24), credit card spends rose by 27.8 per cent, but were low compared to FY23 which surged by 47.5 per cent. In FY22, the spending increased 54.1 per cent, according to data compiled by Macquarie Research.ICICI Bank recorded 4.4 per cent gross credit losses in its FY24 credit card portfolio as against 3.2 per cent year-on-year. SBI Cards’ credit losses in the segment stood at 7.4 per cent in FY24 and 6.2 per cent in FY23, the...

SFBs should be vigilant, proactive to mitigate risks: RBI deputy guv

  The Reserve Bank of India’s Deputy Governor Swaminathan J on Friday instructed the directors of small finance banks (SFBs) to be vigilant and proactive in identifying emerging risks in the sector.Speaking at a conference for directors on the boards of SFBs, Swaminathan highlighted the role of governance in guiding SFBs towards sustainable growth with stability. He also emphasised the importance of sustainable business models.Additionally, he highlighted the need for strengthening cybersecurity to protect the entities against digital threats and urged for a stronger focus on financial inclusion, customer service, and grievance redressal to ensure a broader reach of banking services.Executive Directors S C Murmu, Rohit Jain, and R L K Rao, along with other senior officials representing the Supervision, Regulation, and Enforcement Departments of the RBI, also participated in the conference.   -  Business Standard  30 th  September, 2024

Brigade Hotel Ventures files draft papers with Sebi for Rs 900 crore IPO

  Brigade Hotel Ventures Ltd, owner and developer of hotels in South India, has filed draft papers with capital markets regulator Sebi to raise Rs 900 crore through an initial public offering (IPO).The proposed IPO is entirely a fresh issue of equity shares with no Offer-for-Sale (OFS) component, according to the draft red herring prospectus (DRHP).Proceeds from the issue to the tune of Rs 481 crore will go towards payment of debt, Rs 412 crore will be allocated to the company and Rs 69 crore to its material subsidiary, SRP Prosperita Hotel Ventures Ltd.Additionally, Rs 107.52 crore will be used to purchase an undivided share of land from the Promoter, BEL, and the remaining funds will support acquisitions, other strategic initiatives, and general corporate purposes.The company may raise up to Rs 180 crore through a Pre-IPO Placement.   If the placement is undertaken, the issue size will be reduced.Brigade Hotel Ventures Ltd is a wholly-owned subsidiary of Brigade Enterprises ...