Mutual Funds Alpha: Now to Show a better and real picture!!

SEBI recently had asked all the Mutual Funds to show their returns against Benchmark being Total Return Index. This would redefine the real performances delivered by Mutual Funds while not taking the Dividend returns.

This would mean that the Mutual Funds show that they have made excess returns against the benchmark returns by even including the dividends earned on the investments held by such Mutual Funds.

The real point is that while their benchmarks being indices, which do not hold investments to generate dividend incomes, the mutual fund alpha would always look higher than what they really appear to be.

To give an example the Large Cap Funds have normally displayed their Alphas to be 2% and 1.8% p.a respectively for 3 yrs and 5 yrs period. However if we take away the dividend returns in such alpha, the real alpha comes out to be a mere 0.58% and 0.28% per annum for a 3 yr and 5 yr period respectively.