Have Sensex, Nifty lost relevance as India's stock market indicator?

The heartbreak song beautifully captures the raw emotions of lakhs of retail investors whose portfolios bear little or no resemblance to how the heartbeat indices are faring.

This Tuesday's flat Nifty, for example, failed to capture the 2% cuts seen in Nifty Smallcap 100, 2.5% loss in Nifty Microcap 250 and a near 5% drop in BSE SME IPO index the same day.

The tale-of-two-opposite kind of behaviour has become more pronounced in recent months. Even on days when the portfolios of bluechip warriors were left bleeding, smallcap bulls partied hard.

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An analysis of the daily performance of Nifty50, Nifty Smallcap100 and Nifty Microcap 250 shows that the outperformance of 'chota' stocks started from June. The gap between minnows and kings of Dalal Street have widened since then with the two ends of the showing no correlation on many trading days.

“Nifty and fail to offer a comprehensive portrayal of the market due to their reliance on a handful of heavyweight stocks, leading to a skewed representation. Despite the vibrancy of the broader market, characterized by extensive activity, Nifty, Sensex, and even midcap and smallcap indices overlook this dynamism. While these indices provide a glimpse into market movements, they fall short in reflecting the true market behavior,” points out Santosh Meena, Head of Research, Swastika Investmart.

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The Indian headline indices, which are influenced by external factors such as global market trends, are highly comparable to global peers like Dow Jones. While the Dow is made up of 30 stocks just like Sensex, Nasdaq 100 has 100 stocks just like London's FTSE 100. S&P 500 is the broader index on Wall Street akin to India's Nifty 500 or BSE 500.

In contrast, mid- and small-cap indices predominantly mirror the domestic investment landscape and, therefore, often move independently from headline indices.

“The main indices, comprising mega-large-cap stocks, perform based on the country’s risk, economic outlook, institutional inflows, and geo-political risks. However, midcaps are heavily influenced by domestic sentiment and the influx of domestic investments. Today, midcaps are heavily outperforming but do not completely align with the overall volatile global investment sentiment,” said Vinod Nair, Head of Research, .

Nevertheless, he said, as the Indian stock market matures, the scope of the main indices is expected to broaden in the future.

While broad indices like Nifty 500 or BSE 500 offer a comprehensive overview of the overall market performance, analysts suggest mid and smallcap investors to track Nifty Midsmall Cap 400.

“It covers all the companies of Nifty Midcap 150 and Nifty Smallcap 250 and therefore gives a better sense of the overall market sentiment beyond just the biggest companies,” said Arvinder Singh Nanda, Senior vice president at Master Capital Services.

The big boys of Dalal Street, however, continue to swear by Sensex and Nifty.

“We believe Sensex and Nifty are not losing their relevance as they still constitute a significant part of overall market capitalization and, more importantly, liquidity from an overall market perspective, which is very important for institutional investors, said Nishit Master, Portfolio Manager, Axis Securities PMS.

As smallcaps grow to become midcaps and midcaps mature into largecaps over a period of time, more money will be made by thinking about stocks and not just Nifty.

(Data: Ritesh Presswala)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)