But some experts are still not comfortable about declaring Nifty 50 a better index compared to the Sensex
As domestic stock markets flirt with new highs, it's an interesting fight of heavyweights going on among benchmarks – Sensex and Nifty 50. But the final outcome has been one-sided in recent times, with the 50-share Nifty edging past the veteran 30-share Sensex. Both the well-known benchmarks are used for benchmarking fund portfolios, index-based derivatives and index funds. So, your money, even if you invest in stock markets indirectly via mutual funds (index funds) and unit-linked plans (Ulips) is impacted by the choice of benchmark tracked. For example, if Nifty does better than Sensex, your money in Sensex-based index funds has earned smaller returns than those based on Nifty.
An analysis of financial year (March to April) returns of 10 years show that Nifty 50 has beaten Sensex's returns seven out of 10 times. For instance, in 2016-17 the Nifty 50 gained 18.55% compared to the Sensex's 16.88%. In 2015-16, the Nifty fell 8.86% which is smaller than the Sensex's 9.36% drop. In 2014-15, the Nifty jumped by 26.65%, overshadowing the Sensex's 24.89% gain. In a span of 10 years, its only in FY10, FY13 and FY14 that the Sensex has held its ground against the Nifty.
Explaining the reasons behind Nifty and Sensex performance, Vikas V Gupta, CEO & chief investment strategist, Omniscience Capital, told DNA Money, "If an index has fewer stocks then it will be biased more since each of the larger stocks has a much higher weightage in it as compared to an index with higher number of stocks. Look at Sensex. Its largest stock has a weight of 11.5% currently. At one point in 2006 or 2007, its largest constituent was as high as 17 to 19%. The smallest constituent is 0.91%.
In Nifty, the largest stock has a weight of 9% currently and the smallest is 0.38%. Further, in Sensex, the top 6-7 stocks make up 50% of the index weight. In Nifty, the top 9-10 stocks make up 50% of the index weight. So the dominance of the top stocks is much higher in Sensex than in Nifty, Gupta argues. If a stock is overvalued, it will eventually correct and hence there will be a little bit decay in value. For Sensex, it will be more since it has a higher likelihood and weightage of overvalued stocks as compared to Nifty.
Don't think Nifty's out-performance over Sensex is purely based on financial-year periods. Data shows when it comes to calendar year (January to December) returns, Nifty has again trumped Sensex in eight out of 10 years. Barring 2009 and 2013, Nifty has prevailed over Sensex in the rest years.
But some experts are still not comfortable about declaring Nifty 50 a better index compared to the Sensex. Saravana Kumar, chief investment officer, LIC MF, says that indices usually try to mimic Indian economic scenario. "These indices are, in fact, tracked by most investors as a proxy to invest in India. However, we should not directly compare returns of these two indices with each other. Return differences are merely mathematical calculations, which are the result of variances in constituents, their weights and calculation methodology."
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