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Sensex and Futures On Sensex

Sensex futures are based on the Sensex index, which is a benchmark for the Indian market built over more than a century. For derivatives like Sensex futures and options to work well in India, the underlying index needs to be Sensex or a related index. The key objectives of a benchmark index are to closely track the performance of the broad market it represents, have sector weightings that match the market, and only include stocks that are widely held. Sensex generally meets these objectives better than Nifty. While returns generated by an index are not the main goal, Sensex has outperformed Nifty in 6 of the past 11 years based on annual returns.

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Rajan Nandola
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23 views2 pages

Sensex and Futures On Sensex

Sensex futures are based on the Sensex index, which is a benchmark for the Indian market built over more than a century. For derivatives like Sensex futures and options to work well in India, the underlying index needs to be Sensex or a related index. The key objectives of a benchmark index are to closely track the performance of the broad market it represents, have sector weightings that match the market, and only include stocks that are widely held. Sensex generally meets these objectives better than Nifty. While returns generated by an index are not the main goal, Sensex has outperformed Nifty in 6 of the past 11 years based on annual returns.

Uploaded by

Rajan Nandola
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Sensex and its Futures

Sensex futures are Futures based on the Index. Selection of the Index is paramount for the success of any
Index based derivative. Sensex is the benchmark for the Indian market and is a brand build over more than
a century.

It is this very reason that for broad based markets i.e. Sensex Futures and Sensex Options to work in the
Indian market, the underlying has to be Sensex or Sensex related indices like Sensex TECk.

Let look at some key objectives of a Benchmark Index

What is the objective of a Benchmark Index?

• The objective of a benchmark Index is to closely track the performance of the broad market that it
represents. In case of BSE, this would mean representing the universe of 5000+ stocks listed at the
Exchange.

• The weightage of respective sectors in the index should ideally be the same as their corresponding
weightage in the universe of stocks. For e.g. if the combined weight of all listed scrips in the
Information Technology Sector in the Universe is say 15%, an ideal index should have IT stocks
representing around 15 % of the index.

• Another important objective of a benchmark index is to provide an investable universe of stocks that
can be easily replicated by an index fund. This implies that the constituents of an index should not be
closely held. If an index includes closely held stocks (with high market capitalization), to that extent
the index is subjugated to the vagaries of that stock.

We try to analyze how SENSEX fares on the above parameters

• SENSEX has more closely tracked the movement in Broad market universe/indices as compared to
Nifty (explained ahead).

• With the revamped SENSEX, the weight of IT sector in the index would become 15.7% as compared
to the IT sector weight of 17.6% in the universe. With the revamped Nifty, the weight of IT sector in
Nifty 22.51% as compared to the IT sector weight of 17.6% in the universe. This shows that Nifty is
overweight in the IT sector by 5 percentage points.

• SENSEX doesn’t include stocks with low free-float. For e.g. Wipro has not been part of SENSEX for
this particular reason. The revamped Nifty would, however, include Wipro at the full market
capitalisation of Rs. 37000 crores. It may be noted that the free-float of Wipro is only 16% or Rs. 5920
crores.

Returns of SENSEX and Nifty

Indexing is based on the premise of reflecting the movement in the underlying universe of listed stocks.
Returns generated by an index are a by-product and not the ultimate goal of their efforts towards
representing the underlying universe. For example, if BSE-100 generates higher returns than SENSEX in a
given year, it doesn’t result in making BSE-100 a better index than SENSEX.

In order to do a comparative study of the returns provided by SENSEX and Nifty indices, a uniform period
of 11 years is taken from 1st Jan 1991 to date (both Nifty and SENSEX values are available for this period).
A study of the yearly returns for the past 11 calendar years is given below.

Year SENSEX Nifty Higher Returns


1991 82.09 68.84 SENSEX
1992 37.01 36.28 SENSEX
1993 27.94 36.95 Nifty
1994 17.36 13.40 SENSEX
1995 -20.79 -23.82 SENSEX
1996 -0.81 -1.84 SENSEX
1997 18.60 22.10 Nifty
1998 -16.50 -18.08 SENSEX
1999 63.83 67.42 Nifty
2000 -20.65 -14.65 Nifty
2001 -15.57 -13.91 Nifty

The above annual calendar year returns show that SENSEX has outperformed Nifty in 6 out of the last 11
years. Since calendar year returns compare returns between the given two dates, a comparison of the annual
returns (on a daily rolling basis) is in order. The daily rolling annual return on both the indices for the past
11 years (covering 2426 days) show that SENSEX has outperformed Nifty on 1158 occasions while Nifty
has outperformed SENSEX on 1268 occasions.

The above table shows a wide divergence between Nifty and SENSEX returns in the last couple of years.
We compare the returns provided by these two indices vis-à-vis the broad market indices BSE-500 and
S&P CNX 500 to see which index has closely tracked the listed universe, which is also the ultimate
objective of a benchmark index.

RETURNS AND VOLATILITY OF MAJOR INDIAN INDICES

Returns (in %)

Year SENSEX Nifty BSE-500 CNX-500

2000 -20.65 -14.65 -27.17 -24.63


2001 -15.57 -13.91 -20.15 -18.86

Daily Volatility (1 standard deviation)

Year SENSEX Nifty BSE-500 CNX-500

2000 2.19 2.00 2.25 2.31


2001 1.71 1.62 1.79 1.79

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