Personal Finance
A look at the performance of the sectors in the last few years can provide a perspective as to how the different sectoral exposures aggregate to a performance characteristic for the indices
Updated : Jul 19, 2018, 07:14 AM IST
Efficient risk management
Diversification can help with efficient risk management, as the exposure is not concentrated. An index measures a basket of securities, rather than a single stock, with an additional benefit of a wide sectoral exposure. Each of the S&P BSE LargeCap Indices provides exposure across 10 sectors, as per BSE sectoral classification, with various weights.
For instance, sector weights of the S&P BSE LargeCap Indices, are led by finance at over 30%, consumer discretionary and fast moving consumer goods (FMCG) at over 10%, and basic materials, industrials, and information technology with good shares as well.
Options for different risk/return profiles
Given that there is a variance in the sectoral balance in each of the large-cap indices, the performance of the indices varies and can provide options with different risk/return profiles. A look at the performance of the sectors in the last few years can help provide a perspective as to how the different sectoral exposures aggregate to a performance characteristic for the indices. For instance, while information technology was the outperforming sector in the one-year annualised return category, followed by energy, FMCG and finance were the leaders over the long term (i.e., 10 years). Hence, using indices to measure market segments could provide a cross-sectoral exposure that enables strategies to benefit from diversification.
The indexing route is more diversified than single-stock approaches. Compared with active investing, the methodological approach to index design and consistency helps protect against fund manager bias. The exposure to the large-cap space via indexing as a core strategy offers a portfolio with risk/return characteristics similar to those of the indices.
The writer is business head, S&P BSE Indices