Fundamentally right

Last week, DSP BlackRock Mutual Fund turned over a new leaf — it would no longer compare apples with oranges. Henceforth, it would compare its funds’ performance to the ‘total return’ of their benchmarks and not just the ‘price return’ as is the norm now. Total return includes not just the price return but also the dividends earned by the companies that form part of the fund or the benchmark.

Currently, funds’ performance is based on ‘total return’ but the performance of the benchmarks, say BSE Sensex or Nifty 50, is based on ‘price return’. The result: funds’ excess performance over the benchmarks is overstated, and they are shown in better light than they deserve. Going forward, DSP BlackRock Mutual Fund will add back the dividends to the benchmark index to arrive at its Total Return Index and it is against this that performance would be compared.

Now, this step deserves a clap — it will give the real picture and is a move towards transparent communication with investors. If only this wisdom had dawned earlier. Surely, the money mavens at MFs have known apples from oranges for a long time now. That they still choose the wrong benchmarks is plain wrong. It misleads investors and can result in sub-optimal fund selection.

It’s not that there were no good examples in the industry to follow: Quantum Mutual Fund has been comparing its performance with the benchmarks’ total returns for many years now. DSP BlackRock’s move is better late than never. But what about the rest of the industry, about 40 fund houses? If their peers’ steps do not nudge them into adopting best practices, regulatory diktat should. Reports earlier this year said that SEBI is thinking of mandating that benchmarks’ total returns indices be used for performance comparison. It’s time the regulator moved quickly on this to make mutual funds more rewarding and transparent for investors.

Senior Assistant Editor