InvestorQ : Do you think the Nifty is representative of the market or is it more of a value trap?
Anu Biswas made post

Do you think the Nifty is representative of the market or is it more of a value trap?

Answer
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Ria Jain answered.
4 weeks ago


There are two ways to look at representation of the economy in the index. With the rising importance of services sector in the Indian economy, services represent over 55% of the Nifty Market cap. That is fair and insurance will only add to the heft of services.

However, there is also a negative side to it. For example, the removal of Zee means that the media sector is left with no representation in the Nifty. Also, if the Nifty represents the real economy, then why is Nifty outperforming when GDP growth is contracting?

To an extent, indexes can be seen as a value trap. Let us look at fund performance. Most Indian equity funds did worse than the Nifty in the last 3 years. The reason is Kurtosis where a handful of stocks like RIL, TCS, HUL, Infosys, HDFC Bank have an inordinately high impact.

This type of kurtosis creates a problem for mutual funds as SEBI regulations stipulate a structurally diversified portfolio and that results in underperformance. The funny part is that the index is supposed to be diversified portfolio, but becomes focused portfolio