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Making Sense of NSE indices

, February 11, 2013, 2 Comments

One of my favorite pastimes these days has been spending time on NSE website in an effort to understand stock market performance. In my view, investors, like me, should also make this a hobby to understand stock market performance. Among various other things, I especially look at NSE indices.

NSE has a range of indices starting from most famous S&P CNX Nifty to recently launched CNX Alpha. Indices have been classified under different umbrella such as broad based market index (S&P CNX Nifty, S&P CNX 500, CNX Midcap, etc), sectoral indices ( CNX Auto, CNX Bank, CNX Realty, etc), thematic indices (CNX commodities, CNX consumption, CNX MNC, etc) and strategy indices (CNX Alpha, CNX High Beta, CNX Low Volatility, etc). So how does this help investors? While strategy indices may help investors design, understand and benchmark their investment strategy, sectoral indices may provide a clue about which sector is market’s favorite or which sector is in dumping zone.

Today I am going to focus on the performance of broad based market indices and strategy indices. Let us first start with most followed broad based market indices.

Chart 1: Performance of CNX Nifty Vs Small Cap and Mid Cap indices (indexed to 100)

As we can see from the above chart, market was on roller-coaster ride before Mr P Chidambaram joined as new finance minister. A barrage of reform announcement by new finance minister Mr P Chidambaram helped market gain upward momentum, which looked tired after mid January’13. Small Cap and Mid Cap indices started falling before S&P CNX Nifty. This goes in line with the view that small cap and mid cap companies are supposed to be relatively riskier than large cap companies. And when market goes in consolidation phase, small cap and mid cap stocks are the first one to lose upward momentum. A look at last one month performance of S&P CNX Nifty, CNX small cap and CNX Midcap strengthen this view: while S&P CNX Nifty was almost flat (down marginally by less than 1%), CNX small cap and CNX Midcap fell by 9.1% and 6.8%, respectively. Key takeaway, here, is that this is time to avoid small cap and mid cap stocks while market is under consolidation phase. Investors should keep an eye on upcoming Budget as Budget announcements would be key catalyst for next wave to take shape.

Now it’s time to shift focus on Strategy indices. We would discuss about CNX Alpha, CNX High Beta and CNX Low Volatility indices. These indices are latest addition to range of old indices. These indices (launched in November 2012) take into account the performances of the 50 alpha, high beta and least volatile stocks listed on NSE. Though these indices are mainly used by institutional investors such as fund managers, retail investors may also get some clue on investment strategies or which stocks to avoid or which stocks to pick.

CNX Alpha Index measures the performance of stocks listed on NSE with high alphas (Alpha is risk adjusted measure of active return). It has a well-diversified 50 stock portfolio across as many as 12 sectors. Top five constituents of this index include Hathway Cable & Datacom, Strides Arcolab, United Breweries, Shree Cement and Amara Raja Batteries.

CNX High Beta Index measures the performance of stocks listed on NSE that have high Beta (Beta is a measure of volatility or systematic risk). It has a well-diversified 50 stock portfolio across as many as 12 sectors. Top five constituents of this index include Unitech, Housing Development and Infrastructure, NCC, Pantaloon Retail (India) and Jaiprakash Associates.

CNX Low Volatility Index measures the performance of the least volatile stocks listed on NSE. It has a well-diversified 50 stock portfolio across as many as 11 sectors. Top five constituents of this index include L&T Finance Holdings, Karur Vysya Bank, Colgate Palmolive (India), Videocon Industries and Glaxosmithkline Pharmaceuticals.

Investors can gather more information about these indices on strategic indices

Chart 2: Performance of CNX Nifty Vs CNX Strategy indices (Alpha, Beta and Low Volatility)


Chart 2 clearly points out that high-Beta stock should be avoided as high high-Beta stocks have yielded negative return on both YOY and YTD basis. On the other hand, Alpha and Low Volatility stocks should be most preferred choice as they outperform CNX Nifty on one year horizon.

Investors can replicate the constituents of CNX Alpha and CNX Low Volatility into their own portfolio without paying any fee to fund managers. We should note that index rebalancing for these indices are done of quarterly basis. Therefore, any change in composition of these indices should also be incorporated in investor’s portfolio. Moreover, investors should keep tracking performance of these indices as they do for broader market index S&P CNX Nifty






About author
Rajesh Ranjan is a Chartered Accountant with Post Graduate Diploma in Investment Analysis and MBA(finance) from Asian Institute of Management (AIM), Manila. He has around nine years of experience in the field of investment research (equity and fixed income) with leading financial services firm such UBS and Guggenheim Transparent Value. ...more