For Index funds, is Sensex better than Nifty? Or Nifty is better than Sensex for index funds in India? Let’s discuss this in a bit more detail here.
Nifty and Sensex represent the most popular and widely tracked Indian stock market indices.
The basic difference between Nifty and Sensex is as follows. The Sensex holds the 30 largest stocks listed on the Bombay Stock Exchange (BSE) while the Nifty holds the 50 largest stocks listed on the National Stock Exchange (NSE).
So inherently, the key difference between Nifty and Sensex is that Nifty is designed to act as a benchmark to measure the performance of the top 50 Indian companies while Sensex does it for 30 such companies. Also, the base index value for Sensex is 100 while the base index value of Nifty is 1000. Also, Sensex and Nifty50 are just two of the several stock market indices in India.
Also, it’s not a question of is Sensex better than Nifty or is Nifty better than Sensex. Both represent slightly different things. So there is no point doing such a better/worse kind of comparison in general.
What about the difference in returns of Sensex and Nifty?
While there might be some small differences in the daily movement of the two indices, in general, and the long-term trajectory for both Nifty and Sensex tends to remain in sync. The reason being that a majority of the stocks held in Nifty’s 50 stock portfolio and Sensex’s 30-stock portfolio do tend to overlap.
If you are among those who feel that it’s better to invest in index funds instead of active large-cap funds, then you might have a question about choosing between the Nifty or Sensex for passive investing via index funds.
That is, which of Sensex Vs Nifty is better for index fund investing?
To be fair and if you deep dive into the data, there is not much of a difference between the returns of Sensex and Nifty if you are considering a long enough investment horizon of 10-15 years. No doubt in the short term it’s possible that one index might do better than the other slightly (while other underperforms). But over the long term, oscillating between one index doing better for some time and followed by the other doing better, it eventually sort of evens out.
One more point is that in general, the narrower the index is structurally, the higher the risk of concentration. That can work both ways though. But given that when investing in index funds, the investors want to eliminate some risks like picking the wrong stocks, it is better to bet on an index with more stocks. But that opens up the index to other risks too. Overall though and as the historical data tells, there is nothing to choose between the two. But please do understand that it’s impossible to predict which out of the Nifty or Sensex will do better than the other in a given year.
So which Nifty vs Sensex should you choose for passive investing?
Assuming you are picking index (fund) for long-term investments only, I would say that both options are good to choose from. Both Sensex and Nifty (and their index funds) have given similar performance in the long run and most probably, will do the same in the future as well.
By the way, both indices have an inherent problem that I have highlighted earlier. And that is that they suffer from concentration risks, which is very important for index fund investors to understand as the concentration risk in Indian index eventually gets replicated in the index fund portfolios as well.
So if you have to pick only one between Nifty and Sensex and you are worried about the above-mentioned concentration risk, then probably you can go with Nifty as it has 50 stocks while Sensex has a lesser number of stocks at 30.
So that is about the difference in Sensex Vs. Nifty and choosing between Nifty or Sensex for passive investing in Index Funds in India (2021).