- Zero maintenance charges
- Zero fees for demat account opening
- Volume based brokerage
Read More >
-
The Sensex rejig: How it affects you
The S&P BSE Sensex is considered to be the barometer of India’s capital growth. The shares of 30 financially sound and well-established companies comprise the BSE Sensex pack. (View live market rates)
Since the Sensex shows which way the economy is heading, a periodic reshuffle of the 30-share portfolio is carried out. Some stocks are included while some others get the boot.
Why does this happen? Here is a recent example to illustrate how it works:
- In the latest reshuffle on 18 June, Dr Reddy’s Laboratories was taken out of the Sensex pack. Vedanta Ltd got in.
- Standard & Poor’s (S&P), which carries out the rejig, felt that the pharmaceuticals sector will not drive the Indian economy in the short to medium term. S&P was of the view that the mining and metals stock of Vedanta Ltd holds a bigger promise as the sector can be an engine for the economy’s growth.
- The inclusion of Vedanta Ltd has increased the weight of the metals and mining sector to 2.6% of the Sensex value.
- Meanwhile, the exit of Dr Reddy’s Laboratories has pulled down the pharmaceuticals sector to 1.7% of the index value.
Related read: 4 macro-economic factors that can affect corporate profits in FY18-19
Why a stock reshuffle affects investors
The moment a periodic reshuffle is carried out in the Sensex, asset management companies (AMCs) alter their portfolio. The AMCs do the investments on behalf of investors in the case of mutual funds. More buying activity is seen in the stock which has been included and exits happen fast in the scrip which has been excluded.
For individual retail investors, this is NOT the normal trend.
For exchange-traded funds (ETFs) or index funds, the alteration in the portfolio is mandatory as the funds themselves mirror the benchmark BSE Sensex. However, the AMCs have to ensure that buying into the newly included stock is proportionate to its weight in the index, although some deviations may occur.
For example:
When AMCs invest in or exit the scrips, they keep these proportions in mind.
Why the portfolio gets altered following a Sensex rejig
The Sensex is a benchmark for every asset class. A benchmark is a standard that is used to compare the allocation, risk, and return of a portfolio.
Related read: What are stock market indices?
Apart from the Sensex-30, AMCs also follow other benchmarks like BSE 100 and BSE 500, depending on the nature of the funds they are handling.
Why might a portfolio be altered? The aim is to better the funds’ performance compared to the Sensex.
What changed my portfolio?
If you study the Sensex composition over the past three years, one big change you will observe is the gradual shrinking of space for the ‘defensive’ sector. Information technology (IT), fast-moving consumer goods (FMCG), and pharmaceuticals comprise the all-weather defensives.
Related read: 5 things to know about cyclical, defensive stocks
The defensives have shrunk from 39% in 2015 to 26% at the present date.
For investors, this is somewhat risky as the defensives have withstood the test of time and held on even when the markets turned turbulent. However, several funds have increased their exposure to the defensives over the past three years, even though the space has generally shrunk. It may be a good approach for investors to identify and track those funds.
Alternatively, you can refer to the stocks recommended by our experts.Also read:
