Total Return Index

DEFINITION of 'Total Return Index'

A type of equity index that tracks both the capital gains of a group of stocks over time, and assumes that any cash distributions, such as dividends, are reinvested back into the index. Looking at an index's total return displays a more accurate representation of the index's performance. By assuming dividends are reinvested, you effectively have accounted for stocks in an index that do not issue dividends and instead, reinvest their earnings within the underlying company.

BREAKING DOWN 'Total Return Index'

The Standard & Poor's 500 Index (S&P 500) is one example of a total return index. The total return indexes follow a similar pattern in which many mutual funds operate, where all resulting cash payouts are automatically reinvested back into the fund itself.

While most total return indexes refer to equity based indexes, there are total return index that for bonds, which assumes that all coupon payments and redemptions are reinvested by buying more bonds in the index.

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