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Friday, September 11, 2015

What Is A Total Returns Index

Stock indices like the NIFTY and the SENSEX are price indices - meaning that they capture only the changes in prices of the constituent scrips.

Thus if you own the same stocks that constitute the NIFTY (and in the same weightage), the returns from your portfolio over a given period of time (considering only capital gains and ignoring dividend receipts) should equal the percentage change in the NIFTY during this period.

However your actual returns would be quite different from the movement in NIFTY should you also consider the dividends received during the given period.

A price index which is adjusted by factoring in dividend receipts from the constituent stocks will represent a Total Returns Index.

By factoring in dividend receipts along with capital gains, a  Total Return Index gives a more complete picture of returns generated by the constituent stocks of the Index over a given period of time.

Note: When a company pays out dividend, the price of its share falls by the same amount as the dividend per share on the ex-dividend date.

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