Investor Corner/The asset classes/Equity Concepts
2.1.16 Stock Indices
A stock index is a benchmark that tracks a defined basket of stocks, such as the Nifty 50 or the Sensex. Indices represent the market as a whole and are the standard yardstick for measuring investment performance.
A standard basket, not a single stock
An index is built from a defined set of stocks selected and weighted by rules, most commonly by company size. The Nifty 50 tracks the 50 largest, most liquid companies listed on the National Stock Exchange, while the Sensex tracks 30 large companies on the Bombay Stock Exchange. When someone says the market was up 1% today, they usually mean one of these indices moved by that much.
Why indices matter for investors
An index gives a fair, transparent reference point for judging any actively managed fund's performance. If a large cap equity fund returns 11% in a year while the Nifty 50 returned 13%, that fund has underperformed its natural benchmark for that period, regardless of how good 11% might sound in isolation without that comparison.
Index funds and the alternative
Because indices are transparent and rules-based, funds can be built to simply replicate one at very low cost. These index funds do not try to beat the market; they try to match it as closely as possible. The consistent evidence that most actively managed funds fail to beat their benchmark after fees, over long periods, is the central argument behind the growth of index investing.
How PriLytics helps. PriLytics lets you compare your portfolio's performance against a benchmark such as the Nifty 50 TRI over any period, so you always know exactly how you are doing relative to the market. Compare against a benchmark.