India’s market indices decoded: What separates Nifty 50, BSE Sensex and BSE 100?

Understanding Market Indices: A Key to Gauging Market Performance

Market indices offer a clear view of market performance, representing specific segments or the entire market. Indices are built using selected securities with assigned weightage, helping gauge sector performance and serve as benchmarks for investments. Index funds use them as model portfolios for passive investing. Understanding indices is key for investors.

What is a Market Index?

An index is a select group of securities representing a specific market segment, sub-segment or the overall market. It derives its value, represented by a number, from the prices or underlying values of all the securities comprising a particular index.

Types of Indices

• Main Market Indices: The main market indices in India, which act as a gauge for the overall market performance, are the S&P BSE Sensex and NSE Nifty 50.
• Segment-Specific Indices: There are various other indices, such as the Nifty IT, Nifty Metal, Nifty Realty, BSE Midcap & Smallcap, BSE Bankex, BSE Auto, BSE 100, etc.

How are Indices Constructed?

The representative batch of securities in an index is culled from the broader market based on specific criteria, which can be market capitalisation, size, listing location (exchange on which it is listed), earnings, industry, sector, liquidity, etc.

Weightage Methods:

• Market-Cap Weighting: Based on market cap of each security
• Price Weighting: Based on price
• Equal Weighting: Same weightage to each security
• Fundamental Weighting: Based on metrics like earnings, sales, etc.
• Factor-Based Weighting: Attributes like value, momentum, volatility, etc.

Purpose of an Index

1. To Gauge Performance: Indices help track the price movements and assess the overall performance of a sector or market.
2. Act as Benchmarks: Indices serve as benchmarks for the portfolios of fund managers, traders and individual investors, and help assess whether their stock selection is under- or over-performing compared to the index.
3. Passive Investment: Indices also act as model portfolios for index funds. It helps the passive investors who want to invest in the market without actively seeking individual stocks or trying to beat the market.

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