What is a Benchmark Index?

An index which acts as the benchmark in the market has an important role to play.

While it has to be responsive to the changes in the market place and allow for new industries or give up on dead industries, at the same time it should also maintain a degree of continuity in order to survive as an benchmark index.

What are the popular indexes in India?

BSE-30 Sensex BSE-100 Natex BSE Dollex BSE-200 BSE-500

S&P CNX Nifty S&P CNX Nifty Jr. S&P CNX Defty S&P CNX Midcap S&P CNX 500

What are Sectoral Indexes?

These indexes provide the benchmark for sector specific funds.

Fund managers and other investors who track particular sectors of the economy like Technology, Pharmaceuticals, Financial Sector, Manufacturing or Infrastructure use these indexes to keep track of the sector performance.

What are the uses of an Index ?

Index based funds

These funds tend to replicate the index as it is in order to match the returns on the market.This is also know as passive management. Their argument is that it is not possible to beat the market over a sustained period of time through active management and hence it’s better to replicate the index. Example in India are

• UTI’s fund on the Sensex
• IDBI MF’s fund on the Nifty

Exchange traded funds (ETFs)

These are similar to index funds that are traded on an exchange.

These are pretty popular world wide with non-resident investors who like to take an exposure to the entire market.

S&P’s SPDRs and MSCI’s WEBS products are amongst the most popular products.

Index futures

Index futures are possibly the single most popular exchange traded derivatives products today.

The S&P 500 futures products is the largest traded index futures product in the world.

In India both the BSE and NSE are due to launch their own index futures product on their benchmark indexes the Sensex and the Nifty.

What is the trend abroad?

Although we have a whole host of popular exchange owned indexes abroad including the DAX 30, the CAC 40 and the Hang Seng we see an increasing trend where global index providers are seen to have more influence among the foreign funds and investing community.

What do Global Index providers bring ?

In the age of cross border capital flows and global funds, global index provider provide the uniformity and standardization in their index philosophy and methodologies that allows a global fund to compare performance across regions or sectors.

By following a common industry classification standard in all the countries that they operate in, index providers hope to wean away liquidity from the more popular and home grown indexes.

Also global providers are currently, the only ones in a position to provide pan-continental or pan-global indexes.

What does the future look like?

The future in India looks pretty exciting with Index futures being launched and Index options expected to follow. Hopefully with the growing popularity of ETF’s we might see SEBI allowing them in India too.

Globally while the debate between active and passive fund management still rages, we see standardised indexes growing in popularity.

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