Investigating Stock Market Indices of India


Charles Dow is credited to have conceived the idea of the first stock index i.e. Dow Jones Industrial Average in 1896. Since then, all stock exchanges across the globe have built their own indexes. While they are widely used by the investors to know overall daily market performance, fund managers use them as a benchmark in evaluating their periodical performance. Studies have found that mutual fund managers fail to beat their respective benchmark index. These findings encourage the passive mode of investment through index funds, where money is invested in the same proportion among the securities representing the underlying index. He popularized the index funds as a better instrument for the long term investment over traditional mutual funds owing to lower management costs and their perpetual growth with economy.

At the end of September 2014, there were 43 index funds and 38 exchange-traded funds (ETFs) in India (listed on the National Stock Exchange and the Bombay Stock Exchange), of which 24 were index-based ETFs and 14 were gold-based ETFs (ISMR, 2014). Given the variety of indexes and index funds in India, there are numerous queries in the mind of a passive investor like how the indexes have performed  in the past and which index is the most profitable to invest with.

The present study aims at examining the long run performance of all the broad market stock indexes operational at NSE (National Stock Exchange, India) and evaluating the best performing index amongst them which could be recommended to the passive investor to invest with over a long term.

The paper is organized in the following manner: Section II briefly explains about various broad market indexes at national stock exchange, India followed by the discussion on the previous literature in Section III, then, Section IV explains the data analyzed and the methodology adopted. Section V deals with the discussion of the observed results and finally, Section VI concludes this paper.

  1. About the indexes at NSE, India.

Among the recognized stock exchanges in India, NSE (National Stock Exchange) is the largest stock exchange with maximum daily turnover in cash and derivatives segment followed by BSE (Bombay Stock Exchange) (ISMR, 2014). As on 30 June 2014, there are 36 indexes at NSE, maintained and managed by IISL (India Index Service Ltd, a subsidiary of NSE). They are broadly classified by NSE into four categories, namely Broad market, Sectoral, Thematic and Strategy indexes. This paper focuses solely on the Broad market indexes consisting of the large, liquid stocks listed on the exchange. They serve as a benchmark for measuring the performance of the stocks or portfolios such as mutual fund investments. Stocks are broadly classified into large cap, mid cap and small cap categories based on their market capitalization. Based on this classification, there are five large cap indexes (CNX Nifty, CNX Nifty Junior, CNX 100, CNX 200 and CNX 500), two mid cap indexes (CNX Midcap 50 and CNX Midcap) and one small cap index (CNX Small cap) as listed in appendix I.

  1. Findings and Conclusion

The study examines the long run performance of all the broad market stock indexes, currently operational at NSE (National Stock Exchange, India) from 1st January 2004 till 31st March 2014.It is found that CNX Nifty, the flagship index of NSE, along with all other broad market indexes, is successful in generating superior return over risk free rate proving that Indian equity markets tend to generate better returns as compared to 91-day treasury bills of Government of India. On using CAPM, none of them were able to generate statistically superior risk adjusted excess return over CNX Nifty. However, on considering economic significance, only three indexes yielded positive Jensen Alpha, namely CNX Midcap, CNX Smallcap and CNX Nifty Junior. Thus, CNX Midcap proves to be the best performer among all broad stock indexes after adjusting for risk. So, a passive investor, planning to invest in broad based indexes, should consider CNX Midcap index for investment. But the alpha (Jensen alpha) of these broad market indexes turns negative (Cahart alpha) on being exposed to additional factors i.e. size, value and momentum in Cahart four factor model. This shows that the excess returns evidenced by positive Jensen alpha were attributed to these factors and not due to superior index composition criteria. Moreover, the results of the test of joint hypothesis using CAPM revealed that CNX Nifty cannot be used to replicate most of the other broad market indexes namely CNX 200, CNX 500, CNX Midcap, CNX Small cap and CNX 100 Equal Weight.