If your portfolio comprises investments in mutual funds, how does the rise and fall in market indices affect it? Does it? If not, why not? All this and more we will demystify/illustrate in this short note about the relationship between your fund investment and broader market indices.

The recent euphoric all time rise in Sensex has attracted a lot of attention. Why has this happened? Well, the rise in few stock prices has enabled the Sensex to soar high. That said, the most recent market movement was not broad based. A few large cap stocks soared, but at the same time the mid-cap and small-cap stocks slid down. So the market run was not secular.

This raised an important question from the investor community – if the market has gone up, why haven’t my investments? Here’s why.

When you invest in a particular fund, it doesn’t mean you have invested in the Sensex. Your fund has a particular mandate. This could be to invest in large cap or mid cap or a particular theme or sector. The companies your fund invests may or may not reflect the companies which form Sensex. (Sensex represents weighted price movements of 30 stocks in India).

Each fund you invest has a relevant benchmark index which suits the type and coposition of fund.  There are various indices  defined by stock markets or institutions  for e.g. Nifty Midcap index or S&P BSE 200 etc. Many Midcap schemes benchmark their schemes to Nifty Midcap. Your fund will have broader basket of stocks than the index it follows. As a consequence, a gain or drop in indices may or may not reflect in your fund and.

The thing you should keep in mind when it comes to building and evaluating your fund portfolio is that in India, active fund management is at play. As per historical performance, most of the good funds beat indices. Many times, fund schemes are suggested based on whether the scheme has beaten indices or not. So if you have large cap fund that follows BSE Sensex as benchmark, then it’s worthwhile to compare performance and build relevance in today’s market condition.

If you are investing in say a sector fund or small and midcap fund, comparing it with performance in Sensex is not relevant. The way to evaluate your portfolio is to see how the sectors, themes or industries it invests in are performing, rather than compare it to the rise and fall in the Sensex.

If you’re still wondering why your portfolio of funds hasn’t reflected the heights the Sensex has reached, please talk to us. We’re happy to have a detailed conversation with you about this.


Leave a Reply

Your email address will not be published.