Sensex vs Gold, both gain from 4,000 to 50,000 in last 21 years; yet, Sensex beats gold by about 50%

What gives better returns over the long term — Sensex, or Gold? On the face of it, both seem to accrue equal gains over the years, notwithstanding the short-term fluctuations. Consider this: both gold price and Sensex were at nearly equal levels 21 years ago, and are trading at equal levels now. Back in the year 1999, gold prices averaged at Rs 4,234 per 10 grams, while the S&P BSE Sensex was at 4,141 points. And now, in the year 2021, gold prices have multiplied 12 times to Rs 49,659 per 10 gram (MCX February futures); on the other hand, well, the Sensex has also grown the same — 12 times to 49,625 points (at close on January 21).

Total returns far outweigh Sensex, Gold

However, the actual Sensex returns have surpassed that of gold by as much as about 50% over this period. The reason: the true measure of Sensex returns is not its Price Returns Index (PRI), but Total Returns Index (TRI). The PRI considers only capital appreciation; the TRI includes price appreciation in addition to the dividend, interest, and capital gains.

While the Sensex and gold have moved from about Rs 4,100-4,200 to about Rs 50,000 in the last 21 years, the Sensex TRI has jumped from 4,356 points on 30 June 1999 to 72,222 points on January 21, 2021, multiplying nearly 17 times. Sensex TRI has grown at a CAGR of 14.31 per cent since 1999, and now has a lead of over 22,500 points, or 45% over both Sensex and gold prices.

Gold price: Rs 49,659 per 10 gram on 21 Jan 2021 vs Rs 4,234 in 1999
BSE Sensex: 49,625 points on 21 Jan 2021 vs 4,141 points on 30 Jun 1999
Sensex TRI: 72,222 points on 21 Jan 2021 vs 4,356 points on 30 Jun 1999

Why we must consider TRI to calculate actual returns

TRI reflects the returns on the index arising from a constituent stock price movements and dividend receipts from constituent index stocks. An investor in index stocks should calculate the total returns index instead of the price index to determine the actual returns vis-à-vis the index, Narendra Solanki, Head of Research at Anand Rathi Shares and Stock Brokers, told The Outlooker Online. Also, while comparing returns across different asset classes such as equity with gold etc, total return index as a benchmark for equity should be preferred.

Further, total return index is a more efficient method in determining equity returns as index value return is measured on the basis of capital appreciation as well as dividends, Ajit Mishra, VP Research, Religare Broking, told The Outlooker Online. While the price index only considers capital appreciation. “Hence, in our view, the total return index is much more transparent and credible as compared to the price index,” he added.