NISM Series XIX-C · Chapter 10: Introduction to Indices and Benchmarking

L1 · Foundation

Foundation — What an index is, and the four ways to weight one

Why indices exist and the four uses the workbook lists, the index divisor and how it absorbs stock splits and reconstitutions, and price-weighted, value-weighted, equal-weighted and fundamental-weighted methods worked through with the book's own numbers.

24 min read · Worth 3% of the paper · Written from pages 223–251 of the official NISM workbook · Updated 18 September 2026

10.1 What an index is

It is intuitive that performance of various assets traded in a market are closely tied to the performance of the market. Investors have broad view about the performance of their investments by tying the performance of the investments to the market. In a top-down manner, knowledge about the market performance provides a quick assessment about their investments. Performance of a market where many securities are traded require construction of a measure reflecting all the securities being traded in that market. Indices are such a composite measure.

Dictionary meaning of the word index is "a system of numbers used for comparing values of things that change according to each other or a fixed standard". Market indices serve the same purpose. They reflect the change in the value of the underlying over a period of time and also from the base value used as a reference.

Two references, then: change over time, and change from the base value.

10.2 The four uses of indices

Originally index was created with a view to provide access to a simple indicator reflecting security market information. Charles H. Dow and Edward D. Jones introduced the Dow Jones Average, the world's first security market index, in 1884, with this single objective only.

Charles H. Dow and Edward D. Jones, Dow Jones Average, 1884, the world's first security market index. Names and date, all examinable.

However, with the developments in financial markets and investment management, the uses of indices have found broader application as:

1. Providing a gauge of the market: the original purpose of market index was to provide a gauge of the performance of underlying market. An index reflects the collective opinion of market participants, investor attitudes and behavior about the market dynamics.

2. Benchmarking the investments and actively managed portfolios: as investors find it difficult to assimilate the absolute performance of their portfolio, they use indices as benchmarks to evaluate the performance of active portfolio managers to develop a sense of how the portfolio manager has performed relative to the index.

3. Underlying portfolio for creation of index funds: Indices are serving the basis as the model portfolio for the development of index funds. Index funds play an important role in passive investment style.

4. Proxy for the market portfolio of risky assets when calculating the systematic risk of an asset: the capital asset pricing model (CAPM) states that every security or portfolio is to be priced for its market risk. The market portfolio in the CAPM consists of all risky securities. However, in practice broad based indices are taken as proxy of market portfolio, hence providing the extent of systematic risk of every investment.

Notice how the fourth use ties back to Chapter 5. When you computed beta against "the market", you were really computing it against a broad-based index used as a proxy, because the true CAPM market portfolio — all risky securities — does not exist as a tradeable thing.

Gauge → Benchmark → Index fund → CAPM proxy. Four uses; if a question offers "all of the above", that is very often the answer.

10.3 What makes one index different from another

There are over two million indices available globally. Though all are intended to reflect the overall movements of a group of securities, the differentiating factors are size and scheme of assigning weights.

(The footnote is more precise: according to the Index Industry Association study, in 2019, there were 2.96 million indexes globally.)

The first factor is the sample size used to create an index. Today, powerful computers do allow inclusion of all the stocks on an exchange or market. However, many popular indices are sample based as earlier times. Different sample sizes are taken to represent the same segment of securities. For example, the Indian stock market large cap segment has BSE Sensex 30 and NIFTY 50 as the two popular indices, each having a different sample size. While selecting the sample, care should be taken that the sample is representative of the population.

The second differentiating factor is to allocate weight for each constituent in the sample. Weights can be assigned on the basis of price (a price-weighted index), on the basis of value (a market-value weighted index). Index can also be created by assigning equal weights to the constituents (an equal-weighted index) or by using some fundamental variable like sales, earnings, or return on equity (a fundamental weighted index). Of the four ways of assigning weight to the constitutes, the most popular one is the value weighted method.

Two differentiators: SAMPLE SIZE and WEIGHTING SCHEME. Four weighting methods, of which VALUE WEIGHTED is the most popular.

The index divisor — the device that makes it all work

The concept of index divisor is an important concept to understand the computation of index value. It is a number chosen at inception. It is initially chosen in such a way that the index has a convenient initial value, such as 100 or 1,000. For example, BSE Sensex has an initial value of 100. That means on the inception day the total market capitalization upon index divisor was 100 in case of BSE Sensex. In case of price weighted index instead of market capitalization, it is the sum of the prices in the numerator and divisor in the denominator giving a convenient value of 100 or 1000.

The index provider adjusts the value of the divisor as and when necessary to avoid changes in the index value that are unrelated to changes in the prices of its constituent securities. For example, when changing index constituents, the index provider may adjust the divisor so that the value of the index with the new constituents remains same as the value of the index prior to the changes.

That is the whole point of the divisor in one sentence: it absorbs everything that is not a genuine price change.

10.3.1 Price weighted index

The simplest method of assigning weights to constituents of an index is price weighting. Dow Jones Industrial Average is one example of price weighted index. It is computed by summing the current prices of the constituent securities and dividing the sum by a divisor.

Value of index on day t = Σ (closing price of stock i on day t) / (adjusted divisor on day t)

The stock split adjustment — Illustration 10.1

Stock	Before split	After 2-for-1 split of stock E
A	INR 4	INR 4
B	INR 6	INR 6
C	INR 8	INR 8
D	INR 9	INR 9
E	INR 10	INR 5
Sum	37	32
Index	37 / 3.7 = 10	32 / 3.2 = 10

When a stock splits, the divisor is so adjusted to keep the level of the index as same. In this example divisor is adjusted from 3.7 to 3.2. The adjusted divisor ensures that the value of the index is not fluctuated by these actions and new value for the index is the same as it would have been without the split.

Nothing happened economically — a shareholder who held one share worth INR 10 now holds two worth INR 5. So the index must not move. The divisor falls from 3.7 to 3.2 to hold the index at 10.

Merit and two demerits

The merit of this method is the ease of its calculation as it is simply the arithmetic mean of current stock prices. Before the advent of supercomputing machines, the ease of calculation made sense. However, this advantage faded away due to the computing developments.

Demerit 1 — price bias: Because the index is price weighted, a high-priced stock carries more weight and exercises greater influence than a low-priced stock. A 5 per cent change in INR 5000 stock will cause a larger influence than a 50 per cent change in a INR 50 stock.

Do that arithmetic to feel it. 5 per cent of INR 5,000 is INR 250 of movement in the sum. 50 per cent of INR 50 is INR 25. The tiny move in the expensive stock matters ten times more than the enormous move in the cheap one — even if the cheap company is far larger.

Demerit 2 — downward bias: High growth stocks will tend to have higher prices and because such stocks tend to split, these stocks of growing companies will consistently lose weight within the index.

The winners split, splitting cuts their price, a lower price means less weight. A price-weighted index systematically demotes its own best performers.

10.3.2 Value weighted index

A value-weighted index is generated by taking into consideration the market capitalization of the securities in the index. The initial total market value of all stocks used in the index will be accounted in as sum of individual security's Market Value (Number of Shares Outstanding (or freely floating shares) × Current Market Price).

Under this method the weight on each constituent security is determined by dividing its market capitalization (or free-float market capitalization) by the sum of the market capitalization of all the securities in the index.

Illustration 10.2 — the weights at T₀

Stock	Price	Shares	Market cap	Weight
A	INR 3	50	INR 150	15.46%
B	INR 1	50	INR 50	5.15%
C	INR 7	70	INR 490	50.52%
D	INR 9	20	INR 180	18.56%
E	INR 10	10	INR 100	10.31%
			INR 970	100.00%

The weight of each security is arrived by dividing its market cap by the total market capitalisation. For example, for Security A it is 150/970 = 0.1546 or 15.46%.

Compare this against the price-weighted view. Stock E has the highest price (INR 10) but only 10.31 per cent weight. Stock C at INR 7 carries 50.52 per cent, because it has ten times as many shares. Value weighting asks how big the company is, not how big the price tag is.

In case, base value of the index is to be kept at 100, the total market capitalization will need to be divided by index divisor which will give a value of 100. Index divisor in this illustration will be 9.7 (970/100).

Illustration 10.3 — three months later

Prices move: A falls to INR 0.5, E falls to INR 9, the rest unchanged. Total market cap falls from 970 to 835.

The value of the index will be = 835/9.7 = 86.08 reflecting that index has fallen from 100 to 86.

Note that A's weight collapsed from 15.46 per cent to 2.99 per cent and C's rose from 50.52 to 58.68 per cent — without a single trade by the index provider. The weights re-set themselves.

Illustration 10.4 — reconstitution

Let's say the index provider following the index construction methodology finds that security A is not meeting the criteria of being in the index. In its place it introduces security X. X has price INR 6 and 70 shares, so INR 420 market cap. Total market cap jumps to 1,230.

Since market capitalization of security A is not same as that of security X, the index value changes accordingly. To make index value consistent, index divisor can be chosen in such a way that the value of the index remains the same after the restructuring of the index. Hence new value of the Index divisor will be 14.28 (i.e. 1230/86.08).

The divisor moves from 9.7 to 14.28 so that the index stays at 86.08. Swapping a constituent must not, by itself, move the index.

Why value weighting won

In a value-weighted index, a specified percentage change in the value of a large company has a greater impact than a comparable percentage change for a small company as the weight of individual stocks in the index is determined by the market value of the stocks.

Since the index changes are value driven, there is an automatic adjustment for stock splits and other capital changes in a value-weighted index. This makes value driven index an ideal choice for mounting index funds and index derivatives as a security's weight in the index automatically adjusts to the market value of its outstanding securities changes.

A split halves the price and doubles the shares — market cap is unchanged, so no divisor adjustment is needed at all. That self-correcting property is exactly what an index fund needs.

Free float

The free float is a measure of actual availability of stocks of a company in the market for public investment. The goal to calculate Free Float is to distinguish between strategic (control) shareholders, whose holdings depend on concerns such as maintaining control rather than the economic fortunes of the company, and those holders whose investments depend on the stock's price and their evaluation of a company's future prospects.

While calculating free-float market capitalization the following categories of shareholdings are generally excluded:

Shares held by founders/directors/acquirers which have control element
Shares held by persons/bodies with "Controlling Interest"
Shares held by the Government(s) as promoters/acquirers
Holdings through the FDI route
Strategic stakes by private corporate bodies/individuals
Equity held by associate/group companies (cross-holdings)
Equity held by Employee Welfare Trusts
Locked-in shares and shares which would not be sold in the open market in normal course

And the dates: BSE Sensex was initially calculated based on the "Full Market Capitalization" methodology and was shifted to the free-float methodology with effect from September 1, 2003. NIFTY 50 is shifted to the free float methodology from June 26, 2009.

Sensex: 1 September 2003. NIFTY 50: 26 June 2009.

10.3.3 Equal weighted index

In this method, the constituent securities carry equal weight irrespective of their prices or market capitalization. As an example, a stock with a price of INR 2500 is as important as a INR 40 stock. Similarly, the stock of the largest company by market capitalization is as important as the stock of a company with much smaller capitalization.

Every stock gets 20 per cent in a five-stock index, whatever its price or size. The column on outstanding shares which leads to calculation of market capitalization when multiplied with prices is irrelevant here.

Illustration 10.6 — how it moves

Stock	Price at t₀	Price at t₁	Return
A	6.00	10	67%
B	1.00	1.5	50%
C	7.00	8	14%
D	9.00	8	−11%
E	9.00	10	11%

(67% + 50% + 14% + −11% + 11%) / 5 = 26%. If at T₀ starting value of index was based at 100, at T₁ the index value is 100 + 26 = 126.

The movements in the index is based on the arithmetic mean of the percent changes in price or value for the stocks in the index... It is equivalent of investing an exactly same amount of money in constituent securities. If the investors have started with INR 100 on T₀, on T₁ it has become INR 126. This calculation is based on an arithmetic average but some equal weighted indices use a geometric average calculation as well.

Merit and demerit

The merit of this method is that it does not have price or value bias.

However, when it comes to the usage of this index for creating index funds, such funds will have higher transaction costs, as periodically portfolio needs to be rebalanced so that equal amount stay invested in the constituent securities. In case of equal weight index based funds, if the price of a stock in the index fund goes down, the fund will buy more shares, and if the price goes up, it will sell shares to balance the fund equally in the index. The buying and selling activity leads to high portfolio turnover rate and higher transaction cost.

Read the mechanism carefully because it is counter-intuitive and is examined: price falls → the fund BUYS more; price rises → the fund SELLS. An equal-weight fund is a permanent contrarian, and that constant rebalancing is what makes it expensive.

10.3.4 Fundamental weighted and factor-based index

One criticism of value weighted indices is it results in overweighting overvalued stocks and underweighting undervalued stocks.

Think that through. If the market over-prices a company, its market cap rises, so a value-weighted index automatically buys more of it — precisely because it is expensive.

To counter such structural issue, indexers begun to weight securities by considering some fundamental factors of the company like book value, cashflows, dividend, sales, profits, net assets etc. These sets of indices are also referred as alternative indices.

While constructing fundamental index, the fundamental factor needs to be identified. It can be just one factor or a combination of many factors. In case of many factors the weights of each one of them needs to be determined.

Tables 10.1 and 10.2 — weighted by sales

Company	Previous year sales	Weight	Price at T₀	Price at T₁	Change
A	INR 100 Cr	10%	INR 100	INR 170	70%
B	INR 500 Cr	50%	INR 1,200	INR 1,500	25%
C	INR 400 Cr	40%	INR 850	INR 750	−11.76%

The index has moved from 100 to (70%×10%) + (25%×50%) + (−11.76%×40%) = 14.80%, and the index value is 114.80.

Note what the weights ignore entirely: the share prices. Company A's stock costs INR 100 and Company B's INR 1,200, but weights come from sales of INR 100 crore and INR 500 crore. That is the whole idea — weight by the business, not by the market's opinion of the business.

Some factors of securities return are specific to individual securities, whereas some factors are common to a group of securities. And the risk premium is the reward for exposure to these systematic risk factors.

The four methods, side by side

Method	Weight determined by	Merit	Demerit	Example
Price weighted	Share price	Ease of calculation — arithmetic mean of prices	High-priced stocks dominate; downward bias as growth stocks split	Dow Jones Industrial Average
Value weighted	Market cap or free-float market cap	Automatic adjustment for splits; ideal for index funds and derivatives	Overweights overvalued, underweights undervalued stocks	Sensex, NIFTY 50, S&P 500
Equal weighted	Nothing — all equal	No price or value bias	High turnover and transaction costs from rebalancing	—
Fundamental weighted	Sales, earnings, book value, cashflows, dividends, net assets	Counters the value-weighting bias	Requires choosing and weighting factors	"Alternative indices"

Think of it like this

The cricket team average, weighted three ways

Suppose you want one number for how a cricket team batted this season.

Price weighting is like giving each batsman importance according to his shirt number. Absurd, but that is structurally what a price-weighted index does — it weights by the price tag, a number that carries no information about the size of the company. A 5 per cent change in INR 5000 stock will cause a larger influence than a 50 per cent change in a INR 50 stock.

Value weighting gives each batsman importance according to how many balls he faced. The opener who batted through the innings matters more to the team total than the number eleven who faced two deliveries. That is market capitalisation: bigger company, bigger say.

Equal weighting gives every batsman the same say, opener and tailender alike — a stock with a price of INR 2500 is as important as a INR 40 stock.

Fundamental weighting weights them by something outside this innings altogether — career average, or fitness score. Book value, cashflows, dividend, sales, profits, net assets.

Four honest answers to the same question, and each tells you something the others hide.

The divisor is the shock absorber

A car goes over a speed breaker. The suspension compresses so the passengers barely feel it. The road changed; the ride did not.

The index divisor is that suspension. The index provider adjusts the value of the divisor as and when necessary to avoid changes in the index value that are unrelated to changes in the prices of its constituent securities.

Stock E splits 2-for-1, so the sum of prices drops from 37 to 32. Nothing has happened to anyone's wealth. So the divisor drops from 3.7 to 3.2, and the index stays at exactly 10.

The index committee swaps out Security A for Security X, and total market cap jumps from 835 to 1,230. Again nothing happened to the market. So the divisor moves from 9.7 to 14.28, and the index stays at exactly 86.08.

The rule to hold on to: anything that is not a real price change gets absorbed by the divisor. Splits, bonus issues, constituent changes — the divisor eats them all, so the number on the screen means only one thing: the market moved.

Why the winner keeps getting demoted

A company in a price-weighted index performs brilliantly. Its share price runs from INR 500 to INR 4,000. Naturally its weight in the index rises.

Then the board does what successful boards do: it splits the stock 8-for-1 to keep it affordable for retail investors. The price becomes INR 500 again. The company is unchanged, its shareholders are unchanged — but its weight in the index has collapsed by seven-eighths.

The workbook states the consequence plainly: high growth stocks will tend to have higher prices and because such stocks tend to split, these stocks of growing companies will consistently lose weight within the index.

A price-weighted index quietly punishes its best members for succeeding. This is the downward bias, and it is the deeper of the two objections — the other being simple price bias.

Value weighting has no such problem. A split halves the price and doubles the shares, so market cap is unchanged and so is the weight. That is what the workbook means by automatic adjustment for stock splits and other capital changes.

Free float: the shares that are actually for sale

A promoter family owns 62 per cent of a listed company and has no intention of ever selling. The Government holds another 10 per cent as promoter. An employee welfare trust holds 3 per cent, locked in.

On paper the company's market capitalisation is huge. In practice, only about a quarter of it can ever be bought by an investor.

The free float is a measure of actual availability of stocks of a company in the market for public investment. Its purpose is to distinguish between strategic (control) shareholders, whose holdings depend on concerns such as maintaining control rather than the economic fortunes of the company, and those holders whose investments depend on the stock's price and their evaluation of a company's future prospects.

So out go shares held by founders, directors and acquirers with a control element; shares held by persons with controlling interest; government promoter holdings; FDI route holdings; strategic stakes; cross-holdings by group companies; employee welfare trust equity; and locked-in shares.

Why does an index care? Because an index fund has to be able to buy the index. Weighting by shares nobody will sell would make the index unbuyable. Both major Indian benchmarks made the switch — Sensex from 1 September 2003, NIFTY 50 from 26 June 2009.

The equal-weight fund that buys what falls

Imagine INR 5 lakh split equally across five stocks — INR 1 lakh each. A month later one stock has doubled (now INR 2 lakh) and another has halved (now INR 50,000).

To stay equally weighted, the fund must sell the winner down and buy more of the loser.

In case of equal weight index based funds, if the price of a stock in the index fund goes down, the fund will buy more shares, and if the price goes up, it will sell shares to balance the fund equally in the index. The buying and selling activity leads to high portfolio turnover rate and higher transaction cost.

That is a permanent contrarian machine, and it costs money to run. Which is why the workbook pairs the merit with the demerit: the merit of this method is that it does not have price or value bias, but such funds will have higher transaction costs.

Contrast this with a value-weighted fund. When a stock doubles, its weight in the index doubles too — and the fund's holding has already doubled in value. No trade needed. The fund tracks the index by doing nothing. That is why value weighting became an ideal choice for mounting index funds and index derivatives.

A price index is a salary slip without the bonus

Two employees both earn a basic salary of INR 10 lakh. One receives no bonus; the other receives INR 2 lakh. If you compare only their basic salaries, you would call them equal. You would be wrong by INR 2 lakh a year.

Most of the indices are price based indices. 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.

And the practical instruction that follows: 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.

This matters directly for a fund manager's claim to have "beaten the index". His own returns include the dividends he collected. If he compares them to a price index that excludes dividends, he is comparing salary-plus-bonus against salary — and awarding himself the difference.

Key terms in this chapter

Absolute-return strategy benchmarking: Funds investing independently of broad market movements are benchmarked against a fixed rate pre-determined at launch, such as 10 per cent per annum — not against a market index or any relative benchmark.
Alpha: The excess return of an AIF over its benchmark, computed as R − E(R) where E(R) = Rf + β(Rm − Rf) under CAPM, using Net IRR and matching time periods.
Annualized traded value: For Sensex selection, the median of the monthly medians of daily traded values over a six-month period, annualised using 250 trading days in a year.
AUM for benchmarking: For reporting and benchmarking purposes, AUM means the value of total capital drawn down under the scheme, and reporting is carried out on pre-tax NAV.
Benchmark: The comparable fund or index having similar risk-return characteristics as the AIF being monitored; benchmark return is the return it generates over the same reporting period.
Benchmarking Agency: An agency notified by an association of AIFs representing at least 33 per cent of AIFs by membership, which collects performance, cash-flow and valuation data and publishes industry benchmarks. CRISIL, NSE and Preqin are appointed by IVCA.
Benchmark Report vs Performance Report: A Benchmark Report is the standard report generated on SEBI mandate. A Performance Report is a customised report prepared at an AIF's request, requiring express consent of the AIFs whose data is used and available as a fee-based service.
Broad based index: An index representing an entire market segment and a significant percentage of the selected market — NIFTY 500, for example, covering about 96.1 per cent of NSE free float market capitalisation.
Composite (hybrid) index: An index blending equity and debt to evaluate portfolios exposed to both. The NIFTY Hybrid Index series has 6 indices built from total return versions, with weights reset monthly after drift.
Dollar denominated index: An index measuring returns in US dollar terms, such as NIFTY50 USD = closing NIFTY 50 × exchange rate on base date / exchange rate for the day. Base date 3 November 1995, base value 1000; NIFTY 50 is also computed in AUD and CAD.
Equal weighted index: Every constituent carries the same weight regardless of price or market cap; movement is the arithmetic mean of percentage price changes. No price or value bias, but funds tracking it face high turnover and transaction costs.
Free float: The shares actually available for public investment, excluding promoter and control holdings, government promoter stakes, FDI-route holdings, strategic stakes, cross-holdings, employee welfare trust equity and locked-in shares.
Fundamental weighted index: Weights constituents by a fundamental variable such as sales, earnings, book value, cashflows, dividends or net assets. Created to counter value weighting's overweighting of overvalued stocks; also called alternative indices.
GDP weighted index: A global index allocating country weights by economic size rather than equity market size, to counter market-cap indices ignoring unlisted companies and tilting towards developed markets. MSCI World GDP Weighted Index launched 30 September 1988.
Growth stocks: Stocks with high P/B, high P/E and low dividend yield. The growth manager focuses on the denominator of the P/E — earnings — expecting rapid EPS growth with the P/E ratio roughly constant.
Impact cost: The cost of executing a transaction in proportion to index weight — the percentage mark-up suffered while buying or selling a desired quantity compared to the ideal price of (best buy + best sell)/2. NIFTY 50 requires 0.50 per cent or less for 90 per cent of observations on a INR 10 crore portfolio.
Index: A composite measure reflecting the change in value of a group of underlying securities over time and against a base value. The Dow Jones Average, introduced by Charles H. Dow and Edward D. Jones in 1884, was the world's first.
Index divisor: A number chosen at inception so the index starts at a convenient value such as 100 or 1,000, then adjusted whenever needed so that changes unrelated to constituent prices — splits, capital actions, constituent swaps — do not move the index.
Investability: A function of the liquidity of underlying constituents and the weight of securities in the index; it determines the index's investment capacity.
MSCI India Index: Measures large and mid-cap segments of the Indian market with 86 constituents covering about 85 per cent of market capitalisation, emphasising liquidity, investability and replicability. Reviewed quarterly, rebalanced at the May and November semi-annual reviews.
NIFTY G-Sec Indices: Government of India bond indices across 6 Macaulay duration buckets, taking up to 3 liquid bonds per bucket with outstanding amount above INR 5,000 crore, weighted by amount outstanding, rebalanced monthly.
NIFTY T-Bills Indices: Five maturity-specific indices (30, 60, 91, 182 day and 1 year) plus an all-maturity index, reconstituted weekly and on every T-bill auction.
Price weighted index: Weights constituents by share price; the index is the sum of prices divided by the divisor. Easy to compute but biased towards high-priced stocks, and carries a downward bias as growing companies split. The Dow Jones Industrial Average is the example.
Replicability: The property that it should be possible to passively replicate the benchmark — one of MSCI's three index design criteria alongside liquidity and investability.
Style index: An index built to benchmark value or growth portfolios. Style indices carry much higher turnover than broad market indices because stocks migrate between categories as valuation ratios change.
Total Return Bond Index: Replicates the return from holding the index portfolio, giving a market-value weighted return that accounts for price movements, accrued interest and bond cash flows including coupons, redemptions and repurchases.
Total Returns Index (TRI): An index reflecting both constituent stock price movements and dividend receipts, with indexed dividends reinvested. An index investor should benchmark against the TRI, not the price index.
Valid benchmark characteristics: Under GIPS as adapted by the workbook: specified in advance, relevant, measurable, unambiguous, representative of current investment options, accountable, investable and complete — and it must be an appropriate total return benchmark.
Value stocks: Stocks with low P/B, low P/E and high dividend yield. The value manager focuses on the numerator of the P/E — the price — believing it is cheap and that the market will correct.
Value weighted index: Weights constituents by market capitalisation or free-float market capitalisation. Splits and capital changes adjust automatically, making it ideal for index funds and derivatives — but large companies dominate and overvalued stocks get overweighted.

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Original explanatory writing based on the official NISM workbook for Series XIX-C, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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