Sensex – Excellent benchmark

Team CrawFin/ Harshal Jawale, CFP^CM

While media reports to rise and fall of Sensex on daily basis, it is more important for us as an investor to understand what is happening with our own portfolio during long enough timeframe. I am not a believer of watching Sensex everyday yet I think it is most important indicator to understand what is happening with overall stock markets in terms of sentiments, money flows, stock pickings etc to fine-tune our own portfolio.

History –

Bombay Stock Exchange (BSE) located at Dalal Street, Mumbai and is the oldest stock exchange in Asia. There are over 5000 companies listed on BSE i.e. largest in number in the world. Sensex that constitutes top 30 companies forms 42% of the total market capitalization. This high weight of top 30 makes it key indicator to the representation of the total market. Top 200 companies constitute around 95% of the total daily turnover.

The Bombay Stock Exchange (BSE) regularly reviews and modifies its composition to be sure it reflects current market conditions. The index is calculated based on a free float capitalization method—a variation of the market capitalization method. Instead of using a company's outstanding shares it uses its float, or shares that are readily available for trading. The free-float method, therefore, does not include restricted stocks, such as those held by promoters, government and strategic investors.

Why Benchmark? –

1. Using information from April 1979 (The base value of the SENSEX is taken as 100 on April 1, 1979) onwards, the long-run rate of return on the BSE SENSEX works out to be 18.6% per annum, which translates to roughly 9% per annum after compensating for inflation. (In contrast to what we earn through FD or PF who merely replace inflation, meaning we do not actually earn anything but just replace the depreciating value of money)
2. Regular modification made within composition of Sensex keeps it stronger. For Example – Rel Cap was replaced with Sun pharma and Rel Infra was replaced with Coal India on 8^th Aug 2011. This way bad performer gets kicked out and good performer keep coming in. This is what we essentially want to happen with our own portfolio.
3. While creating composition it should also be noted that not too much of weight is given to a particular sector. For Example – Axis Bank/PNB is worth to enter into top 30 companies with all the parameters except the fact that SBI+ICICI+HDFC is tough to beat and completes the required weight within the index. This brings in diversification that is essential within portfolio.

Composition –

Current top 30 that constitutes Sensex (alphabetically) are given below

Bajaj Auto, Bharti Airtel, BHEL, Cipla, Coal India, DLF, HDFC Ltd, HDFC Bank, Hero Motocorp, Hindalco Ind, HUL, ICICI Bank, Infosys, ITC, JP Associates, Jindal Steel & Power, L&T, M&M, Maruti, NTPC, ONGC, Reliance Ind, SBI, Sterlite Ind, Sun Pharma, TCS, Tata Power, Tata Steel, Wipro.

Companies that were part of Sensex at some point of time since 2001 are –

Novartis, NIIT Ltd, Reliance Petroleum, Castrol, Colgate Palmolive, Glaxo Smithkline Pharma, HCL Tech, Nestle, MTNL, HPCL, Zee Telefilms, Dr Reddys lab, Ambuja Cement, Satyam, Ranbaxy, Grasim, ACC, Reliance Infrastructure, Reliance Capital.

According to me if your portfolio is consistently beating Sensex then you are doing excellent job in terms of replacing bad ones with good ones.

Please Note – One can also keep Nifty (top 50 companies trading in NSE) as a benchmark. All the above concerns are similar in nature except that fact that top 30 will be replace by top 50.