By Raj Mehta, [email protected]

Last week, I met one of my friends who asked me an interesting question, “Why is it that Nifty and Sensex were up 25% in the year 2012 but I have lost money in my portfolio?”. Many times I hear people say Nifty is up 13% year to date or Sensex is up 12% but what does it mean to your portfolio?

CNX Nifty or Nifty 50 is an index of 50 stocks whereas S&P BSE Sensex is an index of only 30 stocks. The criteria for the constitution of this index is set in such a way that only companies with a large market capitalisation can enter these indices. Other factors which are more important like business sustainability, profitability, growth, management have not been considered. So this would include a possibility that “Hot sector companies” might find the place in the index whereas a well managed, dividend paying company might not be included. The criteria of selecting the index constituents shifts the bias towards large market capitalisation companies and the index is not well represented. For eg. ITC has a weightage of 10.68% in BSE Sensex currently but you might not have it in your portfolio considering the valuations that it is trading at. If today ITC moves up by 5%, then the index would move up just by its weightage in ITC but your portfolio return could actually be negative.