A common question investors have is, “should I use the Nifty or the Sensex for passive investing?” In this article, we report the return difference between the Sensex and Nifty for various durations to appreciate how a 30 stock index can differ from a 50 stock index.
Sensex is the oldest stock index of India. It has the top 30 stocks by market capitalization trading in the BSE representing 40% of the total market cap at BSE. The Nifty has the top 30 stocks traded at the NSE. Both indices are weighted by a float-adjusted market capitalization method.
Both indices suffer from concentration risks highlighted earlier – Do index fund returns depend upon just a few stocks (Concentration risk)? – and one would expect, the Sensex has more of it. In Oct 2020, RIl occupies about 15% of the Nifty and about 17% of the Sensex. HDFC Bank about 9.6% in the Nifty and 10.5% in the Sensex.
If we look at the total returns index price movement from June 1999, there is not much difference between the two.
Now let us look at the Sensex minus Nifty return difference over progressively increasing durations such as 1,3,5,7,10 years.
The return difference is on the left (yellow). Notice that in the last decade, even over this short duration, the difference has relatively subsided which is healthy.
You can see the return difference progressively reduce. Even if we assume a 1% return difference, sometimes it could be in favour of the Sensex and sometimes the Nifty. It would be hard to tell when – not in the past but in the future in real time.
Question: Nifty vs Sensex: Which should I choose for passive investing?
Answer: Since this should be used only for long-term investments, the return difference becomes small over time and therefore it does not matter much which is used. Both options are equally good. Those worried about the concentration risk can go with Nifty.
A related and natural question is: Will Nifty 100 or NIfty 500 reduce concentration risk? In Oct 2020, Nifty 100 has almost 13% exposure to RIL and 8.4% of HDFC Bank. Nifty 500 has about 10.4% of RIL and 6.7% of HDFC Bank. There is however a price to pay: The fund manager effort is higher, the tracking error would be more and the expenses would be more. Read more: Axis Nifty 100 Index Fund Impressive AUM but is it expensive? and Motilal Oswal Nifty 500 Fund: Avoid & stick to Nifty 50 Index funds
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video! ⇐ More than 640 investors and advisors use this!
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 2525 investors and advisors are part of our exclusive Facebook Group! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 585 salaried employees, entrepreneurs and financial advisors are part of our exclusive Facebook Group! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos in an exclusive Facebook Group!
My new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author
M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] comAbout freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)Free android apps
- All calculators from our book, “You can be Rich Too” are now available on Google Play!
- Install the Financial Freedom App! (Google Play Store)
- Install Freefincal Retirement Planner App! (Google Play Store)
- Find out if you have enough to say "goodbye" to your employer (Google Play Store)