Index is an important indicator of stock-market performance and should be used as a benchmark to compare your MF performance.

Performance of BSE Sensex - a broad market index

Performance of BSE Sensex – a broad market index

Index explained

An index consists of a set of companies carefully chosen to represent the performance of a stock-market or a sector. Actual index number is arrived at using various metrics of a component companies including
(a) company’s market cap (company share price x number of shares outstanding)
(b) % of total shares available to non-promoters – also known as free-float
(c) company’s weight based on the importance.

Example indices

In India, there are two major indices S&P BSE Sensex and Nifty 50 . Both these indices are example of broad-market indices which track broader stock market and are usually quoted in the financial press. Nifty Broad Market Indices lists broad-market indices provided by NSE.

In addition there are sectoral indices which track a specific sector like auto or pharma sector. Nify Sectoral Indices provides more information on various sectoral indices provided by NSE.

Index funds

Index funds are low-cost mutual funds that track underlying index. For example HDFC Index Fund – Nifty Plan invests in a way that its performance is almost same as Nifty 50 index. Such funds have an advantage of a low-expense ratio (typically less than 0.5%) as compared to actively managed funds (typically 2-3%).

Why indices are important?

MF investors should pay careful attention to Indices for two reasons
1. Indices indicate how the stock market is performing.
2. Mutual fund managers compare their performance against these indices rather than the actual return.

More information
1. Nifty Indices FAQs gives detailed information on indices in general and indices managed by National Stock Exchange in particular.
2. Nifty index funds lists set of Mutual Funds that track Nifty indices.