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Investors who bet on the CNX 500 stocks have made higher returns than those who invested in the Nifty since September. If you put in Rs 40,000 and bought every stock in the Nifty 50 on September 30 2013, you would have gained nearly 25 per cent. By contrast, you would be richer by nearly 40 per cent if you spent Rs 2 lakh buying one stock each in the CNX 500 universe. Why this big difference?
Sector weights
One reason for the divergence in performance is that not all sectors performed equally well in the rally from the September trough. For instance, pharma and IT sectors were laggards while construction and consumer focussed sectors did well. IT services forms nearly 20 per cent of Nifty, while the share of this sector in CNX 500 is only 6 per cent (price weighted).
Likewise, consumer discretionary sector accounted for 16 per cent of the Nifty but a much higher 25 per cent of CNX 500. The sector gained from the outlook of lower copper and other input prices. A lower share in this sector hit returns in Nifty index.
Stock weights
The other reason why the broader index outperformed was due to differences in how stocks within a sector performed. If we take the construction and engineering industry, a star performer, L&T is the only stock in the Nifty index, accounting for less than 1 per cent share of the index by market cap. The stock gained a good 87 per cent. In the broader index, the median gain in the segment was a whopping 185 per cent.
Even in sectors that did not boast such returns, individual stock performance varied. For instance, pharma stocks, which accounted for a tenth of the Nifty universe, did poorly - with 3 of the 4 stocks making a loss. However, pharma stocks in the CNX 500 such as Sanofi, which accounted for a sixth of the sector by price, posted neat gains.
Price and market cap
Even within the CNX500, you would have foregone 7 per cent returns by buying the index versus buying each of the stocks. The market cap weighted index return was 32 per cent, compared to 39 per cent by buying one stock of each of the components. The rally in mid- and small-cap stocks, compared to large-cap ones is why market-cap weighted returns were lower. The difference was however not that noticeable in the Nifty which has primarily large-cap stocks.
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