Nifty is a price index and hence reflects the returns one would earn if investment is made in the index portfolio. However, a price index does not consider the returns arising from dividend receipts. Only capital gains arising due to price movements of constituent stocks are indicated in a price index. Therefore, to get a true picture of returns, the dividends received from the constituent stocks also need to be factored in the index values. Such an index, which includes the dividends received, is called the Total Returns Index.
Total Returns Index reflects the returns on the index arising from (a) constituent stock price movements and (b) dividend receipts from constituent index stocks.
Methodology for Total Returns Index (TR) is as follows:
The following information is a prerequisite for calculation of TR Index:
- Price Index close
- Price Index returns
- Dividend payouts in Rupees
- Index Base capitalisation on ex-dividend date
Dividend payouts as they occur are indexed on ex-date.
Indexed dividends are then reinvested in the index to give TR Index.
Total Return Index = [Prev. TR Index + (Prev. TR Index * Index returns)] +
[Indexed dividends + (Indexed dividends * Index returns)]
Base for both the Price index close and TR index close will be the same.
An investor in index stocks should benchmark his investments against the Total Returns index instead of the price index to determine the actual returns vis-à-vis the index.
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