Definition
Price Return Index
A price return index tracks only the price movements of its constituents and ignores dividends, so it understates the total return actually available to investors who reinvest distributions.
Headline Indian index levels, such as the commonly quoted Nifty 50 and Sensex figures, are price-return values that exclude dividends. While useful as a market barometer, the price index is an incomplete measure of investor returns because it omits the income component.
Since SEBI requires fund benchmarking against the total return index, the price index is mainly a reference and trading level rather than a fair performance yardstick. The cumulative shortfall of a price index versus its TRI counterpart equals the reinvested dividends compounded over the period.
Related terms
- Tracking DifferenceTracking difference is the actual cumulative return gap between an index fund or ETF and its benchmark over a period, typically negative because of fees and costs.
- Index ConstructionIndex construction is the set of rules defining how an index is built, including eligibility criteria, weighting scheme, number of constituents and selection thresholds for liquidity and size.
- Total Return Index (TRI)A total return index measures performance assuming all dividends and other distributions are reinvested, capturing the full return earned by a holder rather than just price appreciation.
- Index FundAn index fund is a passively managed mutual fund that aims to replicate the performance of a market index by holding the same securities in the same proportions, at low cost.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.