A short primer on sectoral indices

So, in this chapter, we’ll take a quick look at the concept of sectoral indices - an overview of sorts. In the following chapters, we’ll take an in-depth look at the many sectoral indices available in the Indian stock market. But first, let’s begin at the basis.

The concept of sectoral indices involves two things - sectors and indices. If you’ve been following Smart Money up until now, you’re no doubt familiar with both of these. In the previous chapter, we took an in-depth look at what sectors are. And in an earlier module, where we discussed the fundamentals of the markets, we learned all about indices, isn’t it?

Let’s quickly recap what sectors and indices are all about.

What are indices?

Say your friend, a young investor who’s just getting started with the stock market, asks you this question - “How is the stock market moving today?” 

How would you answer this query? Given that there are thousands of stocks listed on the NSE and the BSE, it’s impossible to track the movement of the shares of each listed company. Instead, a smarter way to assess the market’s performance would be to quickly look at the top few companies on the exchange and track their movements, right?

• So, if the shares of most of the top companies are on an upward trend, you would say that the markets were performing well that day. 
• On the other hand, if they’re moving downward, you would conclude the markets were performing poorly. 

These top companies that you just picked- those are what make up the major stock market indices. Now that we’ve revisited the concept of indices, let’s check out what their definition is.

Defining indices

Stock market indices are indicators that reflect the performance of the market as a whole or of a certain segment of the market. A stock market index consists of a group of companies whose shares are traded on an exchange. Each index measures the price movement and the performance of the shares of its constituent companies. This means that the performance of the index is directly proportional to the performance of the stocks in the index. To put it simply, when the prices of the stocks in an index go up, that index, as a whole, also goes up. 

What are sectors?

Sectors, as we saw in the previous chapter, are areas of the economy made of companies engaged in similar lines of business. This could involve the manufacture or sale of products or services. The stock market is also divided into sectors to reflect the way the economy is partitioned. Companies that belong to the same sector generally share a number of common operating characteristics. 

So, what are sectoral indices?

Let’s put two and two together. Sectoral indices are indicators that reflect the performance of specific sectors in the stock market. They give summaries and benchmarking data pertaining to the market sectors. As an investor, you’ll find that sectoral indices make it possible for you to track a stock against specific sectors.

Sectoral indices in India

In the Indian stock market, the two major exchanges - the NSE and the BSE - both have their own set of sectoral indices. These indices have been created to reflect the major economic sectors, so investors can get a fair idea of how a sector is performing fairly easily by merely tracking the index.

Check out the sectoral indices in the NSE and the BSE below.

Sector	Sectoral index: NSE	Sectoral index: BSE
Auto	NSE Auto Index	S&P BSE AUTO
Bank	NSE Bank Index	S&P BSE BANKEX
Consumer durables	NSE Consumer Durables Index	S&P BSE CONSUMER DURABLES
Finance	NSE Financial Services Index NSE Financial Services 25/50 Index	S&P BSE Finance
FMCG	NSE FMCG Index	S&P BSE Fast Moving Consumer Goods
Healthcare	NSE Healthcare Index	S&P BSE Healthcare
IT	NSE IT Index	S&P BSE Information Technology
Metal	NSE Metal Index	S&P BSE METAL
Oil and gas	NSE Oil & Gas Index	S&P BSE OIL & GAS
Realty	NSE Realty Index	S&P BSE REALTY
Media	NSE Media Index	-
Pharma	NSE Pharma Index	-
Private Bank	NSE Private Bank Index	-
PSU Bank	NSE PSU Bank Index	-
Basic materials	-	S&P BSE Basic materials
Consumer discretionary GS	-	S&P BSE Consumer discretionary Goods & Services
Energy	-	S&P BSE Energy
Industrials	-	S&P BSE Industrials
Telecom	-	S&P BSE Telecom
Utilities	-	S&P BSE Utilities
Capital goods	-	S&P BSE CAPITAL GOODS
Power	-	S&P BSE POWER
Teck	-	S&P BSE TECK

You’ll notice that both the NSE and the BSE have sectoral indices modelled after top economic sectors like auto, IT, banking, etc. So, many of the sectoral indices on the NSE and the BSE will have indicators of the same economic sectors. 

• For instance, the Nifty Auto Index is the NSE’s sectoral index modeled after the automobile sector, while the corresponding sectoral index in the BSE is the S&P BSE AUTO. 
• Similarly, the Nifty FMCG Index is the NSE’s sectoral index modeled after the FMCG sector, while the corresponding sectoral index in the BSE is the S&P BSE Fast Moving Consumer Goods.

Why do we need sectoral indices?

As you’ve already seen, we have a number of indices in the stock market. When there are already broad market indices like the NIFTY and the SENSEX, why do we need sectoral indices? As it turns out, there are two key reasons sectoral indices are beneficial to investors and traders. 

• They make sectoral assessment easier

Broad market indices give you a good idea of the market’s performance, as a whole. But what if you want to know how a particular sector is performing? For instance, say you want to understand how the banking sector is faring. Without sectoral indices, you would need to pick each of the top banking stocks and analyse how they are performing individually in order to understand the sector’s overall state. This would not just be cumbersome, but it may also be prone to many errors. 

Sectoral indices, however, make this job easier for you. They are benchmarked against the top stocks in each sector. So, if you want to know how a sector is doing, all you need to do is take a look at the corresponding sectoral index.

• They make stock assessment easier

Now, a sector-based index gives you a good idea of the sector’s performance. But if you’re interested in investing in a particular stock in that sector, you’ll no doubt want to know if that stock has been underperforming or overperforming with respect to the benchmark. 

For instance, say you want to invest in the shares of Axis Bank. Now, merely looking at the price movements of the company’s stock may not tell you much. But when you compare the stock’s performance with that of the sectoral index, you can get a better perspective. It tells you if the shares of Axis bank have been performing better or worse than the other shares in that sector.

Wrapping up

Well, that wraps up this chapter of sectoral indices. In the upcoming chapter, we’ll get into the details of some of the top Nifty sectoral indices, so you can understand how they’re constituted. Keep learning more with Smart Money.

A quick recap

• The concept of sectoral indices involves two things - sectors and indices.
• Stock market indices are indicators that reflect the performance of the market as a whole or of a certain segment of the market. A stock market index consists of a group of companies whose shares are traded on an exchange. 
• Sectors are areas of the economy made of companies engaged in similar lines of business. 
• Sectoral indices are indicators that reflect the performance of specific sectors in the stock market. They give summaries and benchmarking data pertaining to the market sectors. 
• In the Indian stock market, the two major exchanges - the NSE and the BSE - both have their own set of sectoral indices. These indices have been created to reflect the major economic sectors, so investors can get a fair idea of how a sector is performing fairly easily by merely tracking the index.
• Sectoral indices make sectoral assessment and stock assessment easier for investors.