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 ā€œprice 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

ā€œThe NAV of schemes takes into consideration the valuation of the security as well as the dividend. So the NAV that comes out is a ā€˜total returnā€™ NAV. The benchmark indices that are available are all ā€˜priceā€™ 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. 

ā€œThe sector should gradually move to total return indices for comparing scheme performance as it will give a more accurate picture of the fund managersā€™ capability and bring in more transparency," said Manoj Nagpal, chief executive officer, Outlook Asia Capital. ā€œThe 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. 

ā€œAbout 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


Whatā€™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 whatā€™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

GST collection for November rises by 8.5% to Rs.1.82 trillion

  New Delhi: Driven by festive demand, the Goods and Services Tax (GST) collections for the Union and state governments climbed to Rs.1.82 trillion in November, marking an 8.5% year-on-year growth, according to official data released on Sunday. Sequentially, however, the latest collection figures are lower than the Rs.1.87 trillion reported in October, which was the second highest reported so far since the new indirect tax regime was introduced in 2017. The highest-ever GST collection of Rs.2.1 trillion was reported in April. The consumption tax figures highlight the positive impact of the recent festive season on goods purchases, providing a much-needed boost the industry had been anticipating. The uptick in GST collections driven by festive demand had been anticipated by policymakers, who remain optimistic about sustained growth in rural consumption and an improvement in urban demand. The Ministry of Finance, in its latest monthly economic review released last week, stated that I...

Budget: Startup sector gets new Fund of Funds, FM to allocate Rs 10K cr

  The Indian startup sector received a boost with Finance Minister Nirmala Sitharaman announcing the establishment of a new fund of funds (FoF) in the Budget 2025. The minister unveiled a fresh FoF with an expanded scope, allocating Rs 10,000 crore. The initial fund of funds announced by the government with an investment of Rs 10,000 crore successfully catalysed commitments worth Rs 91,000 crore, the minister said.   ā€œThe renewal of the Rs 10,000 crore commitment to the Fund of Funds for alternative investment funds (AIFs) is a significant step forward for the Indian startup and investment ecosystem. The initial Rs 10,000 crore commitment catalysed Rs 91,000 crore in investments, and I fully expect this fresh infusion to attract an additional Rs 1 lakh to Rs 1.5 lakh crore in capital,ā€ said Anirudh Damani, managing partner, Artha Venture Funds.   Damani further added that this initiative will provide much-needed growth capital to early-stage startups, further strengthenin...

RBI to weigh growth slowdown, inflation at its MPC meeting this December

  Despite GDP growth declining to 5.4 per cent in the Julyā€“September quarter, the Reserve Bank of Indiaā€™s (RBI) six-member monetary policy committee (MPC) is expected to maintain the current repo rate during its review meeting this week, according to a Business Standard survey of 10 respondents. Among the respondents, only IDFC First Bank forecast a 25-basis-point (bps) reduction in the repo rate. Since May 2022, the RBI has raised the repo rate by 250 bps to 6.5 per cent as of February 2023 and has held it steady across the last 10 policy reviews. The latest GDP figures, published on Friday (November 29), showed that growth for Q2 FY25 slowed to 5.4 per cent year-on-year, down from 6.7 per cent in Q1. Most survey participants suggested that the RBI might revise its growth and inflation projections for the financial year. The poll indicated that the central bank could lower its growth estimate from the current 7.2 per cent and increase its inflation forecast, currently at 4.5 per c...