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Key Takeaways
- The Sensex is the leading index for the Bombay Stock Exchange, and it’s been climbing at a notable rate since the pandemic hit.
- Historical data for the Sensex isn’t always reliable, making its future harder to predict than U.S. equivalents like the S&P 500. But India’s demographics and shifts in global production indicate that the country’s economy is in a position for further growth.
- Two of the most affordable ways to gain exposure to India’s stock market are through Sensex ETFs and Q.ai’s Global Trends Investment Kit.
India’s stock market has been performing particularly well after the initial dip that most world economies experienced with the onset of COVID-19. On top of the recent success of theIndian stock market, the country’s economy is poised for growth with a relatively young and highly-educated population.
If you want to invest in the Indian economy without researching every last company in this foreign market, there’s an index for that. It’s called the Sensex.
What is the Sensex?
Think of the Sensex like India’s version of the S&P 500, except much smaller.
The Sensex is an index of the 30 largest liquid, public companies in the Bombay Stock Exchange (BSE). It’s generally viewed as a demarcation of how the Indian economy is performing as a whole.
The Sensex – which is short for ‘sensitive index’ – launched in 1986. It grew an average of 14% per year between its launch and 2021, but the numbers on those returns might be a bit unreliable. While the Sensex has performed well since India established governmental oversight for securities (with a particularly spectacular performance since 2020), the BSE was heavily manipulated prior to 1992.
Which companies are in the Sensex?
There are 30 companies in the Sensex. As of November 2022, they are as follows (in order of market price):
- Nestle
- Maruti Suzuki
- Bajaj Finance
- Ultratech Cement
- Dr. Reddy’s Lab
- TCS
- Asian Paints
- Titan
- Reliance Ind.
- HUL
- HDFC
- L&T
- Kotak Mahindra Bank
- Bajaj Finserv
- Infosys
- HDFC Bank
- M&M
- Indusind Bank
- HCL Technologies
- Tech Mahindra
- Sun Pharma
- Icici Bank
- Axis Bank
- Bharti Airtel
- SBI
- WIPRO
- ITC
- Power Grid
- NTPC
- Tata Steel
Who decides which companies are in the Sensex?
Conveniently enough, the Sensex is operated by Standard & Poor’s, as in the exact same people who run the S&P 500 in the U.S.
To decide which companies belong in the Sensex, S&P looks at these criteria:
- Is the stock listed on the BSE?
- Is there high liquidity?
- Does the stock have a high average daily turnover?
- Is it a large-cap stock?
- Does it have high market capitalization?
If the answer is ‘yes’ to all of the above, it’s likely the stock will end up in the Sensex.
Another factor that comes into play is market representation. The most heavily represented stocks in the Sensex are banks, IT consulting and software, as well as oil and gas. These are also the three categories most heavily represented in Indian equity markets.
How is the Sensex calculated?
Originally, the Sensex was calculated using the free-market capitalization method. This means to calculate market capitalization, you multiply the value of each stock times the total number of shares.
But in 2003, the Sensex switched to the free-float capitalization method. That means instead of including all shares, the index only considers those that are liquid. Any shares that can’t easily be sold – such as those owned by governments or institutional investors – don’t get factored into the equation.
To calculate the Sensex, you first take the value of each individual equity and multiply it by the number of total shares. Then, you multiply that number by the company’s free-float factor. The free-float factor is between 0.55 and 1.00. If 100% of the shares are liquid, the company’s free-float factor would be 1.00. If 55% of the shares are liquid, the free-float factor would be 0.55.
Add up the total of all 30 companies. Then, you look at the day’s index divisor, which is calculated using the index’s base value from the 1978-1979 time period. The calculations for the index divisor will vary depending on changes to the 30 companies, stock splits, and other actions.
Divide the sum of the free-floating market cap of all 30 companies by the index divisor, and you arrive at the Sensex’s value.
The Sensex’s deepest dip over the last 5 years was on Apr. 3, 2020 when it hit 27,590.95. That was a fall from its strongest pre-COVID value of 41,945.37 on Jan. 17, 2020.
As of November 9, 2022, the Sensex has climbed up to 60,524.27, indicating the Indian economy is stronger now than it was before the pandemic.
Does the Sensex behave the same as the S&P?
At the root of this question is the viability of both the U.S. and Indian stock markets over the long-term. In the U.S., we often say that if you wait long enough, the stock market always goes up. This is backed up by a lot of historical data, but that could change if the U.S. ever lost its footing as one of the world’s leading economies and financial markets.
The Sensex doesn’t have as long of a history, having launched in 1986. The picture gets even blurrier when you consider that prior to 1992, the BSE was volatile, and we don’t really know if it was a reflection of the Indian economy as it is today. Around that time, India’s infamous Mr. Harshad Mehta – also known as ‘the Big Bull’ – exposed how easy it was to manipulate the Indian stock market by artificially inflating its value single handedly.
In response to the actions of Mr. Harsha Mehta, the Indian government formed the Securities Board of India (SEBI), the country’s SEC equivalent. That means 1992 is the first year we can really start trusting the numbers.
With only 30 years of reliable history, we don’t have the same historical data from India as we do from the U.S. stock market. Conceivably, we could say that if the Indian economy continues to grow in perpetuity, we would expect the BSE – and therefore the Sensex – to grow in value, too.
It’s an argument that could be made, but we just don’t have enough data to make the call for sure one way or another. For what it’s worth, the Sensex has risen dramatically even from the peak of Mr. Harshad Mehta’s 1992 scam, when it sat at 4,467.31.
Can Americans Invest in the Sensex?
Yes, Americans can invest in the Sensex. The easiest and most affordable way to do so is to purchase the BSE Sensex ETF – ISXIF.
Another option is to invest through an SEC-approved international broker, or an SEBI-approved Indian broker. These options tend to be far more expensive and require a minimum initial investment of at least $10,000.
A different way to broaden your investments outside of the U.S. market is by using Q.ai’s Global Trends Investment Kit, which gives you access to stocks and bonds along with other asset classes from established and emerging markets across the globe.
Download Q.ai today for access to AI-powered investment strategies.
Source: https://www.forbes.com/sites/qai/2022/11/17/what-is-the-sensex-and-how-do-you-invest-in-it/