A Higher Standard

by puneinvestor

oopsilon

Buried somewhere deep inside the National Stock Exchange’s (NSE) website is a page that says the following about the CNX Nifty index (emphasis mine):

“CNX Nifty reflects the return one would get if investment is made in the index portfolios. As Nifty is computed in real-time, it takes into account only the price movements. However, the price indices do not consider the return from dividend payments of index constituent stocks. Only the capital gains due to price movement is measured by the price index. In order to get a true picture of returns, the dividends received from the index constituent stocks also needs to be included in the index movement. Such an index, which includes the dividends received, is called the Total Returns Index.”

The CNX Nifty Total Returns (TR) index value is published on the NSE website once every workday evening. Perhaps it is this lack of real-time data which accounts for the virtual absence of this number in popular discussions about the performance of the stock market.

Because the Total Returns index includes the price performance of the price index constituents and their dividends, it always leads the price index.  Since June 30, 1999 (the earliest available data point for the TR index), the difference has been approximately 1.6 percentage points compounded annually.  In the world of long-term, compounded financial returns, this is not an insignificant number. It would have accounted for more than a quarter of the absolute return since 1999.

Therefore, any proper comparison of a money manager’s returns to the market index must use the CNX Nifty TR, which is at 7634.29 as of April 30, 2013.

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Image © oopsilon

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