Young Investor

The right benchmark for your portfolio

Bhavana Acharya | Updated on March 10, 2018

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If your portfolio has abundant stocks belonging to a few sectors, it would be wise to compare performance to sector-specific indices.The BSE 500 and CNX 500 indices are used to gauge how markets have broadly performed.The returns to your portfolio must be compared to a benchmark to see if performance has been dismal.

Updating your stock portfolio brings no joy these days. That stock you thought was a sure-fire multi-bagger last year is now languishing in the dumps.

But before becoming depressive, look at your portfolio's composition. and remind yourself that portfolio returns must be compared to a benchmark to see if performance has been truly dismal.

Here's where stock indices designed by the stock exchanges are of help. Depending on which stocks make up the majority of your portfolio, different indices can be used for benchmarking.

Using certain criteria, a stock market index groups stocks, and has a value. As the stocks that make up an index move, the index value changes.

Suppose you've invested in six stocks, and these have collectively dropped 30 per cent between January and December 2011. Of these, say four are mid-cap stocks.

In such a case, the BSE Midcap index or the CNX Midcap index would serve as a gauge. In 2011, the BSE Midcap index fell 35 per cent. Your stock-picking, then, is in fact rather good, since you've beaten the benchmark.

Based on market cap

The two indices mentioned above are constructed based on their market capitalisation; that is, they are made up of midcap stocks. Along these lines, if a greater number of large-cap stocks feature in your portfolio, use the BSE Sensex or the NSE Nifty as a benchmark. For small-cap stocks, the benchmark indices would be the BSE Smallcap and CNX Smallcap.

As a general rule, stocks with a market cap of over Rs 7,500 crore can be taken as large-cap stocks. Those belowwith less than Rs 2,500 crore in market cap fall in the small-cap basket. That leaves the stocks in between these two thresholds as midcaps.

But why should such benchmarks be set? By and large, large-cap stocks are safer investment bets.

The companies are larger, , more stable and can weather downturns much better than smaller companies. Large-cap stocks also enjoy a higher float; impact costs are relatively lower than that of mid-and small-cap stocks.

Small and mid-cap stocks are far more volatile and riskier bets, with lesser information freely available on the companies. Given such a difference in nature of these stocks, comparing the performance of predominantly mid-cap based portfolio with the large-cap Sensex will not give the right picture.

Based on sectors

Stock exchanges also have sector-themed indices. Sometimes, the fortunes of a sector may be particularly bad, when others could be having a capital time. Sector prospects reflect in stock prices. For instance, the past year has seen the infrastructure sector beset with problems such as heavy debt, lack of new orders and so on with stocks in this sector having a miserable time. On the other hand, stocks in sectors relying on consumer spending such as FMCG have mostly had a pleasurable run.

If your portfolio has an abundance of stocks which belong to a few sectors, it would be wise to compare performance to sector-specific indices. But it's only the main sectors for which indices have been constructed by the exchanges. These are realty, auto, metals, banking, capital goods, pharmaceuticals, oil and gas, IT, FMCG, power and PSUs.

For instance, there's the BSE Bankex and CNX Bank index for banks. Then you have the CNX IT, CNX Media, BSE IT and BSE TECk indices for IT, media and telecom sectors.

The BSE Healthcare index represents stocks in the pharmaceuticals space. You can look at the movements of these indices to understand how different sectors are faring. It helps understand whether your stock is alone in a rally or decline, or part of a broad sector trend.

Other indices

Besides marketcap and sectors, there are other indices which are useful. The BSE 500 and CNX 500 indices, for instance, represent about 94 per cent of the total market capitalisation. It's these indices which are used to gauge how markets have broadly performed. So if you have a motley mix of sectors and marketcap, you could use this index to see if you've picked stocks well.

There's also the BSE IPO (Initial Public Offers) index. It contains the stocks listing through IPOs. Once a stock has completed two years, it is removed from the index. Then you have thematic indices such as the BSE Shariah 50 and the S&P CNX Nifty Shariah, containing companies whose operations comply with Shariah norms.

The NSE has other theme indices such as the CNX Consumption Index representing the domestic consumption sector, CNX Commodities Index covering sectors such as oil and petro products, cement, sugar, metals etc, CNX Infrastructure Index and others.

Where to find them

In the BSE, click the ‘Market Indicators' tab on the homepage for details and in the NSE, it is features on the right panel of the homepage. This will give the day's index movements, movement of the stocks that make up the index and the previous day's close.

Historical values for the indices on the BSE Web site can be accessed at ‘Indices' tab or the ‘Archives' at the top and bottom, respectively, of the homepage. The NSE Web site has historical information as one of the options under the ‘Indices' option in the drop-down menu of the ‘Products' tab on its homepage.

Published on January 07, 2012

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