Before we get into details on the returns of both these indices, let us decode both these indices for you.
S&P BSE SENSEX
Created in 1986, the Sensitive Index or Sensex is the oldest stock market index for equities. It comprises of 30 shares belonging to well-established financially sound companies. These companies span across various sectors. The performance of the Sensex can thus be considered as a reflection of the larger markets. The Sensex value is calculated on the market capitalisation method. Therefore, the larger the size of the company, the higher is its weightage. So if the market capitalisation increases by 10%, so does the index.
Now let us understand with an example of how stock prices impact the Sensex. We assume that the base value of the Sensex is 100. One of the Sensex stocks is trading at Rs200. Due to some positive news, the stock price goes up to Rs260 in a day. This means the stock has moved by 30%. As a result, the Sensex will also move up by 30 points to 130, registering growth of 30%.
S&P CNX Nifty
The Nifty run by the National Stock Exchange came into being in 1996. It comprises of 50 shares belonging to 24 sectors of the Indian economy. The Nifty uses the same calculation process at the Sensex. However, there are three basic differences:
|Parameters of differences||Nifty||Sensex|
|Number of stocks||50||30|
What do the returns indicate?
Now that you know about the differences between the Sensex and Nifty, it is time to move on to the next factor of interest i.e. the returns. In the year 2018, a year that witnessed much volatility, the Sensex closed with gains of only 5.9%. The Nifty, on the other hand, registered gains of 3.2%. However, if you look at the growth rate, the Sensex has a CAGR of 14.1%, while Nifty has a CAGR of 13.89%.
While you may assume that a 13-14% annual returns are pretty great, hold on before you get too excited. The 13% figure is an average of a decade that has seen several crests and troughs. Returns have fluctuated wildly between the past decade between -30% to over 20% returns over this time period. However, average stable returns are generated over the long term. This is because equities have the potential to provide the best inflation adjusted returns over the long term.
If you are new to stock market investing you need to know that volatility is a part and parcel of market participation. The key is to cut out the noise around you and make sound investment decisions. An attempt to time the market, without the requisite knowledge, may result in losses. Thus, it is wise to seek professional market advice or invest in the equity route through mutual funds that are run by professional money managers.