Unlike full mcap method, shares that are held by the promoter, group company, shares under lock-in period, shares held by the strategic investors (to the extent identifiable) etc. are considered as non-free-float shares and these shares are not included for index computation. Example: As compared with earlier example in 7(a) above of ONGC Ltd. under full mcap method where 100% of companies mcap was considered for index calculation, only 3% of company’s equity would be considered for free-float mcap index calculation as 97% of the shares are held by the central government in the capacity of promoter. Consideration of equity for index computation is the fundamental differentiator between full mcap and free-float mcap method.

Summation of free-float mcap of all the constituents / index base mcap * base index value

Where

Free-float Mcap total shares outstanding * investable weight factor (IWF) * stock price of one company

Index Divisor = Mcap of all constituents as on the base date adjusted for change in the indices

Base index value = Initial value assigned to the index on the base date

As per this methodology, no distinction is being made between large and the small company. Each company is treated in an equal way regardless of its size. In case of CNX 100 Equal weighted index, each security (there are 100 stocks in CNX 100 Equal weighted index) is assigned a weight of 1%. From this point onwards, weight of a stock may go up or down depending upon the movement of stock price. Weightage of each stock in the index are again realigned to 1% at the time of periodic rebalancing.

Formula: Summation of mcap of all the constituents / index base mcap * base index value

Where

Mcap = Shares in index * stock price of one company

Index Divisor = Mcap of all constituents as on the base date adjusted for change in the indices

Base index value = Initial value assigned to the index on the base date

Weightage is high in case of a company with large full or free-float mcap. Such company tends to have a greater share or concentration in the movement of index. In case of capped indices, maximum weightage to any single index constituent is defined. In other words, no single stock can have a weightage of more than prescribed limit. Example: In case of CPSE index, CNX Consumption index of IISL, no single stock can have a weightage of more than 25%. Similarly, indices can also be capped at a sector level. In such cases, weightage of sector cannot exceed the prescribed limit. Normally, for creation of sectoral and thematic indices, capped methodology is widely followed.

Formula: Summation of mcap of all the constituents / index base mcap * base index value

Where

Mcap = total shares outstanding * IWF * capping factor * stock price of one company

Index Divisor = Mcap of all constituents as on the base date adjusted for change in the indices

Base index value = Initial value assigned to the index on the base date

As the name suggests, the weightage pattern of each stock is modified depending upon a theme of an index. In case of CNX Low Volatility index, company that reported lowest volatility gets the highest weight in the index and vice versa. CNX Alpha, CNX High Beta index are few other examples of indices calculated based on modified market capitalization method.

Formula: Summation of mcap of all the constituents / index base mcap * base index value

Where

Mcap = Shares in index * stock price of one company

Index Divisor =Mcap of all constituents as on the base date adjusted for change in the indices

Base index value = Initial value assigned to the index on the base date

The index is calculated considering price of all the index constituents. While selection of scrips under this methodology may be based upon various factors, the calculation does not take into account any factor other than the stocks prices. Dow Jones Industrial Average (DJIA), Nikkei 225 indices are few examples of price weighted method. DJIA is one of the oldest index representing 30 companies traded at NYSE. The index was launched in 1872 with initial composition of 12 companies in the index.

It was originally computed by adding up the per-share price of the stocks of each company in the index and dividing this sum by the number of companies. That's why it's called an average. Over the years, stock splits, spin-offs and other events have resulted in changes in the divisor, making it a very small number.  

Dividend paid by the companies to its shareholder is typically not included in the index calculation. When a company trades on ex. dividend basis, stock price of the company normally gets reduced by the amount of dividend per share (presuming that other market factors remains constant and there is no other impact on stock price due to any other market factors). With reduction in the stock price of the index constituent on account of dividend, the index value declines proportionately. However, the asset management company receives dividend from the shares they hold on behalf of its unit holders of the index funds/ ETFs and as such there should not be any loss to the investors of the fund. Total return index therefore takes into consideration the dividend paid by the index constituents. As a theory, the amount of dividend so received from the index constituents is re-invested in the index portfolio and the index value calculated based on such re-investment of dividend represents the total return index value. The total return index value is a true benchmark or an indicator for the fund managers managing the passive index funds/ ETFs.

Formula: Return Index =Previous TR Index * [1+((Today’s PR Index + Indexed Dividend)/ Previous PR index)-1)]

Where

PR Index Returns = (Today’s PR Index – Previous PR Index)/ Previous Index *100

Indexed Dividend =(Shares in index * dividend per share)/ Index Divisor * Base Index value

In the example given below, two index constituents are paying dividend with ex. date on 25th day.

The index is calculated considering price of all the index constituents. While selection of scrips under this methodology may be based upon various factors, the calculation does not take into account any factor other than the stocks prices. Dow Jones Industrial Average (DJIA), Nikkei 225 indices are few examples of price weighted method. DJIA is one of the oldest index representing 30 companies traded at NYSE. The index was launched in 1872 with initial composition of 12 companies in the index.

It was originally computed by adding up the per-share price of the stocks of each company in the index and dividing this sum by the number of companies. That's why it's called an average. Over the years, stock splits, spin-offs and other events have resulted in changes in the divisor, making it a very small number.