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.
After my friends comments, I decided to do some data mining as to the comparison between index returns and overall market capitalisation of all the listed companies.
|
Nifty |
BSE Sensex |
Overall market cap |
|
|
01/01/2007 |
4000 |
13827 |
$1.8 trillion |
|
31/08/2013 |
5480 |
18691 |
$1 trillion |
|
Return |
37.00% |
35.18% |
-44.44% |
|
01/01/2010 |
5200 |
17473 |
$1.6 trillion |
|
31/08/2013 |
5480 |
18691 |
$1 trillion |
|
Return |
5.38% |
6.97% |
-37.50% |
Note: The data in the above table is approximate data and might not be accurate
As you can see in the data, there is huge discrepancy in the index returns and the overall market capitalisation of all listed companies. Index returns might be skewed by a few stocks such as ITC, Reliance, HDFC and HDFC Bank. Hence Nifty/Sensex might be a very concentrated portfolio of stocks and might not be a true barometer for comparing your portfolio returns.
Ruchir
Thought provoking post!!
So what in your opinion should be a good barometer to measure portfolio growth? Bond yields? or FD interest rate?
Raj Mehta
Thanks Ruchir for your feedback. According to me, neither FD interest rate nor bond yield would be a good benchmark since debt and equity are two different asset classes with different risk profiles. So for comparing your portfolio return, you should select indices such as CNX 500 which is less biased to individual stocks as it has 500 stocks instead of 30/50 stocks in Nifty/Sensex. Or if you have more midcap stocks in your index, you could compare your returns to index such as CNX Midcap index. So your barometers will keep on changing according to the stocks you hold in your portfolio but broadly you can use a standard benchmark CNX 500.
devidas
I want to Thank you and Congratulate you for disclosing the 100% of portfolio of PPFAS Long Term Value Fund. 1st time in my life I have seen any AMC disclosing 100% of their portfolio.
Keep the good governance going.
Raj Mehta
Thanks for recognizing our efforts. We will keep doing whatever we can from our side to benefit our investors and hope to keep up the good governance.
Jitendra P.S.Solanki
A very good analysis not only for investors but even for advisors too..
R Bhaskaran
Thanks for an insightful analysis.
Regards
Bhaskaran
Jay Mehta
The Sensex is calculated using the Free-float Market Capitalization’ method. In this method, the index reflects the free-float market value of the 30 constituent stocks relative to a base period. Thanks for sharing a great article.