Why Nifty/Sensex is not the correct barometer to compare portfolio performance?

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 capitalization 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 criterion of selecting the index constituents shifts the bias towards large market capitalization 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 friend’s comments, I decided to do some data mining as to the comparison between index returns and overall market capitalization of all the listed companies.

	NIFTY	BSE SENSEX	OVERALL MARKET CAP
01/01/2007	4000	13827	$1.8 trillion
30/10/2013	5780	19525	$1 trillion
Return	44.50%	41.20%	-44.44%
01/01/2010	5200	17473	$1.6 trillion
30/10/2013	5780	19525	$1 trillion
Return	11.15%	11.70%	-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 capitalization 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.

By -  PPFAS

Can The New Governor Revive Flagging Economy?

Indian stock markets got a much needed cheer after a long time after a slew of measures were announced by the new Reserve Bank of India Governor Mr. Raghuram Rajan, in his very first day at office. While the measures per se were not as drastic, but the calming effect of an assured RBI Governor played a major role in soothing the nerves among market participants and led to sharp bounce back in currency as well as equity markets.

Key Highlights of Governor Speech

• The Governor insisted on insisted on monetary stability as the prime role of RBI. Mr. Rajan also reiterated that Indian economy is fundamentally sound and the concerns are overdone.
• Dr. Raghuram Rajan also hinted that new banking licenses will be awarded by January 2014.
• Also, fixed-rate swap for FCNR (B) deposits was also announced by RBI. FCNR are dollar-denominated deposits for expat Indians. This is for three years at 3.5%, for over 3-year deposits.
• The RBI has also increased the current overseas borrowing limit for banks from 50 per cent of the unimpaired Tier I capital to 100 per cent.
• RBI also announced its intention to launch Inflation Indexed Savings Certificates linked to the CPI to retail investors by November 2013.

Positive Impact on Markets

Indian markets gave big thumbs up to the RBI measures and proactive steps taken by the new Governor on his very first day which led to a sharp rally in rupee as well as equity. The rupee bounced sharply from lows over 68 per dollar and has already appreciated by almost 7% since the announcements took place. Consequently, even equity markets joined the party and recovered from lows of below 5200 on Nifty and is currently trading at above 5800 on expectations of further action.

Road ahead

Mr Rajan has already become a celebrity for the markets after the blockbuster opening speech which led to unprecedented elation in market participants. However, one must not lose sight of the fact that there is only so much that RBI can do to revive an economy where Government holds the key to curb twin deficits and bring back foreign confidence. The Government must take decisive policy action soon which may not be simple in the wake of upcoming elections. While RBI Governor has shown the intent to revive the economy, it will take the twin combo of RBI and Government bring a sustained and meaningful recovery in a sluggish economy.

By Rajat Gupta– Research Analyst – Concept Securities Private Limited