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nism-series-xa-total-returns-index-tri-vs-price-return-index-benchmarking[ INVESTMENT ADVISER (LEVEL 1) ]

Why does SEBI mandate that mutual funds in India must benchmark their scheme performance against the Total Returns Index (TRI) rather than the Price Return Index (PRI)?

[ A ]Because TRI captures both capital appreciation and dividend cash payouts reinvested from index constituent stocks, providing a true and fair performance comparison against mutual fund NAVs which also reflect dividends.[ CORRECT ]
[ B ]Because PRI is calculated in US dollars while TRI is calculated in British pounds.
[ C ]Because TRI guarantees that the mutual fund will always beat the market index.
[ D ]Because PRI does not include stock market price changes.
Takeaway

SEBI mandates benchmarking against the Total Returns Index (TRI) because TRI captures both capital appreciation and reinvested dividend income from index constituents, matching how a mutual fund's NAV already reflects dividends received — giving a true, fair performance comparison.

Derivation
A Price Return Index tracks only the capital-appreciation component of index constituent stocks and ignores dividends paid out along the way, while a mutual fund's NAV inherently includes any dividend income the scheme's underlying holdings generate (since that cash either gets reinvested or adds to the fund's assets). Comparing a fund's NAV-based return against a PRI benchmark would therefore be an unfair, apples-to-oranges comparison — the fund gets 'credit' for dividends in its NAV while the PRI benchmark doesn't reflect that same dividend income, systematically making the fund's outperformance look better (or underperformance look smaller) than it truly is.
Why the others fail
B — Because PRI is calculated in US dollars while TRI is calculated in British pounds.
TRI and PRI are both calculated in the same domestic index currency (e.g., Indian Rupee terms for Indian equity indices); the distinction between the two lies in whether dividends are included.
C — Because TRI guarantees that the mutual fund will always beat the market index.
Benchmarking methodology has no bearing on whether a fund will beat its index — TRI simply ensures a fair like-for-like comparison of returns; it does not guarantee outperformance in any way.
D — Because PRI does not include stock market price changes.
PRI does track and include stock price changes (capital appreciation); its limitation is that it excludes dividend income, not that it fails to reflect price movements at all.