The mutual fund industry is shifting to TRI benchmarks in February. The mutual fund industry is waiting to see how investors would react to the new benchmarks.ET.com Mutual Funds spoke to Radhika Gupta, CEO, Edelwiss Mutual Fund, which is using TRI as a benchmark since September 2017. Edited interview.
Edelwiess Mutual Fund introduced TRI as benchmark in its schemes last year. How many schemes have been benchmarked against TRI till now? What has been your experience managing such schemes?
Yes, in September-October, 2017, we benchmarked all out domestic equity schemes against TRI. Many online portals are still showing the earlier benchmarks against our schemes, I don’t know why. But if you look at our factsheets, the TRI indices are clearly mentioned as the benchmarks.
Switching to TRI was a sudden move for us last year, but all the fund managers were very happy with the move. Coming to the other point, I don’t think there is any change in the way we managed our funds. I would say it has just made the representation of the schemes more accurate.
Industry players are still not sure about how TRI will impact the schemes. There are a lot of apprehensions about it. Do you think there’s anything to be concerned about?
We believe there is no reason as to why we should not do it. It is a global best practice and we should definitely adopt it, as India grows into a significant capital market. This is just a step to follow global standards. Secondly, TRI is a transparent and accurate representation to an investors and anything that is in the interest of transparency should be done. Thirdly, there is no practical problem in switching to the TRI benchmark. This is a policy that Sebi had proposed already and there is n implementation problem as well. So, I don’t think there is anything to be worried about or resist this change.
TRI would be a tougher benchmark than plain indices to beat. The margin of outperformance would also come down. Since investors generally look at the outperformance to choose schemes, do you think after TRI there will be a change in their behaviour?
It is definitely going to be difficult to beat the TRI benchmark compared to the plain vanilla ones. But we have to understand that we were beating an artificial benchmark till now. I think this will be a non issue for some categories like a midcap, but it will be an issue for categories like largecaps, where the outperformance is already little. This is why I think investors can move to lower cost largecap funds. We had cut our largecap expense ratio, six month ago. This is also happening at a time when the new guidelines are coming up. So, in categories like largecaps, where the alpha is diminishing, we might see a shift to lower cost products.
Will it have an impact on the way funds are managed?
I don’t think there will be a big change. TRI has nothing to do with how the money is being managed. Yes, the higher benchmark will force us to raise our standards. I think fund managers and AMCs will look to better their standards of investing. The move will hence be good for the investors.
Due to lack of awareness about TRI, many investors might find it difficult to accept the lower returns that their schemes will generate. Do you expect investors to get disappointed as the margin of outperformance decreases?
We need to understand and also make the investor understand that the returns they were getting pre-TRI and post-TRI are the same. The money you make is the same, only the comparison has changed. And I don’t think many regular investors even think about the benchmarks or look at them. TRI is just a way of giving investors a clear picture about what they rightfully earn. It is in their interest and I don’t think we will see a backlash on this issue.
Financial planners suggest that TRI benchmarking might nudge investors towards passively-managed index funds? What are your thoughts?
It may. But that’s not necessarily a bad thing. TRI is a clearer perspective on what they are earning and if they think the returns are satisfactory in the index funds, they should. At the end, TRI is t make mutual fund more transparent and investor-friendly. If index funds attract them, there’s no reason why they shouldn’t invest.