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The index was originally published in 1986 with a base value of 100 and with the base year as 1978-1979. The base value was set at 100 to make calculations easy, and so that percentage change could be represented logically. For example, if the market capitalization of the stocks on the index rose by 10%, the index would accordingly rise 15% to 110.

It is considered the benchmark index of the Indian stock market. It is the oldest index in India and provides time-series data from 1979, BSE, previously known as Bombay Stock Exchange, says on its website.

The objective of the S&P BSE SENSEX Today is to measure the performance of the top 30 stocks in India by market cap and liquidity. The index has seen a few changes in its methodology as the Indian market has evolved over the past three decades, but none have affected the objective of the index. The most recent change was the consideration of differential voting right (DVR) shares as securities eligible for inclusion in the index, subject to fulfilling the size and liquidity criteria of the index methodology.

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A Brief History of the Sensex

The S&P BSE Sensex Today, or just the Sensex as it is known, is an index of actively traded stocks of 30 financially stable and well-performing organizations representing various industrial sectors. The market capitalization and liquidity of these stocks make them eligible for this list.

The list includes industry heavyweights from different sectors like TCS, SBI, HDFC Bank, Reliance Industries, Infosys, ONGC, ITC, Sun Pharmaceuticals, SBI, Tata Motors, and Maruti Suzuki, among others. The index assigns weight to each of these 30 stocks, and, depending on the movement in these stocks, the index goes either up or down. However, over 5,000 stocks are actively traded on the index.

The index is calculated using the free float of the 30 stocks multiplied by their market cap. This number is then divided by the present level of the index to find the value of the Sensex.

The index is managed by a committee comprising fund managers, academicians, finance journalists, and market participants. Given its long historical data and wide acceptance, the index is often called the pulse of the Indian stock markets.

How is the Sensex Calculated?

Sensex Today, which is also referred to as BSE 30, was calculated based on the market capitalization or “Full Market Capitalization” when it was launched but shifted to a "Free-float Market Capitalization" methodology from September 1, 2003. This method is used by all major index providers including MSCI and FTSE.

 Free float is the proportion of total shares issued by the company that is readily available for trading to the general public. It does not take into account promoters’ holding, government holding, and other shares that will not be available in the market for trading in the ordinary course of events.

 Free-Float Market Capitalization = Market Capitalization x Free Float Factor

 To give an example, let’s assume that Firm A has 100 shares. Out of these 100, 70 are available to the general public and 30 are owned by the government. This means that 70 are ‘free-floating` shares and thus the free float factor will be 70%.

 ‘Market capitalization’ is the valuation of the company. It can be determined by multiplying the price of a share with the number of shares issued.

To Calculate Sensex Today:

1.       The market capitalizations of all 30 companies in the index are determined.

2.       The Free Float market capitalization of all 30 companies is calculated.

3.       Free Float market capitalizations of all the firms are added to get a total.

4.       Formula of Sensex is applied; Sensex = (total free float market capitalization/ base market capitalization) * Base index value.

5.       The base year to calculate Sensex is 1978-79 and the base value is static but it has to be changed. According to BSE, Rs. 2501.24 crore is to be used as the base market capitalization.

6.       The base index value is 100.

7.       So, Sensex = free-float market capitalization of 30 firms /25041.24 crores*100

So, how are these 30 companies selected?

The BSE`s criteria for selecting these companies are as followed:

1.       BSE-listed stock: The stock should have a listing history of at least one year on BSE to be considered.

2.       Market Capitalization: The Company should be in the Top 100 companies listed by full market capitalization.

3.       Trading frequency: The Security should have been traded on each and every trading day for the last year, BSE says. Exceptions to this can be made in case of extreme reasons.

4.       Average Daily Trades and Average Daily Turnover: The Security should be in the Top 150 firms listed by the average number of trades per day and by the average value of shares traded per day for the last year.

5.       In the opinion of the Index Committee, the firm should have an acceptable track record, BSE says on its website.

6.       The Index Committee meets every quarter to review all the BSE indices including SENSEX. However, every review meeting may or may not lead to a change in the constituents.

How is Sensex different from Nifty?

• Nifty is the benchmark index of the National Stock Exchange. ‘National Fifty’ make up Nifty.
• The major difference between Sensex and Nifty is the number of constituents.
• While Nifty 50 constitutes the top 50 companies actively traded in NSE, Sensex comprises the top 30 companies actively traded in BSE.
• Today Sensex is more niche, and on the other hand, Nifty is broader as it has 50 firms.

Selection of Sensex constituents

The stocks on the Sensex Today are chosen based on the following factors

• Industry representation: Only industry heavyweights are chosen to represent their sector.
• Market capitalization: The Company’s market cap should be among the top of the index. Also, it should be more than 0.5% of the index’s total market cap.
• Frequency of trading: The Company should be active (live) on the exchange for at least one year. The exemption can be made in specific situations like share suspension, etc.
• Average daily trade: The average number of shares traded per day last year should be among the Top 150.
• Average daily turnover: The average value of the shares traded per day in the last year should be among the Top 150.

Free-float market capitalization methodology

The constituents of the Today Sensex are calculated according to the free-float market capitalization method. Free float means the total number of shares available to the public for trade. This excludes promoter holding or any holding apart from the public. Consequently, a company’s free-float market cap would be, the number of shares available to the public * the market price of each share. So, if a company has 20 lakh shares available to the public, and each share is valued at Rs150, the free-float market capitalization of the company will be 20,00,000*150 = Rs30cr.

However, it should be kept in mind that the Sensex constituents are market leaders and each of them easily has a market cap ranging in ‘thousand crores’.

How has the Today Sensex Performed in Recent Decades?

The Today Sensex has grown at a compounded rate of roughly 14% between 1986 and 2021. This growth reflects the substantial growth of the Indian economy during that time frame, particularly the expansion of that nation’s middle class. The Sensex declined by nearly 40% in March 2020 during the coronavirus health crisis but recovered strongly over the remainder of the year. Today Sensex set a new all-time high as of February 2021. 

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INDEX FUNDS

Index funds are a type of fund that replicates a specific index in their investment portfolio. The investors may aim to generate similar returns as the index it is replicating. The indices that such index funds might track may include S&P BSE Senses, etc.

As such, index funds are suitable for investors with longer investment horizons who are comfortable with the returns generated by the broader market indices instead of aiming to outperform the market. Since the portfolio of the index funds must be the same as the composition of the underlying index, these funds will not be able to operate any alpha in any market.

We can say in simple words index funds are a type of mutual fund. A mutual fund is a kind of a bunch of money owned by a bunch of people. Back in the day, mostly all types of mutual funds were actively managed. It means a smart manager was paid to take all the money and buy many stocks with it at his discretion.

The people interested in investing would put some money into the mutual fund, and they would put some money into the mutual fund, and they would get a bit of all the stocks the confident guy concludes to buy. It was a nice way to diversify your portfolio without doing all the research and trading yourself.

Index funds are a preselected collection of hundreds or thousands of stocks, and bonds. These are being designed to mimic a given market or index.

An index fund is a passive investment vehicle with a portfolio of stocks designed to imitate the portfolio of a financial market index. It is an investment strategy with relatively little trading, few brokerages, etc. these funds provide balanced, risk-managed returns with possibly better long-term results.

Why invest in an Index?

• Passive investing - Eliminates stock selection risk and fund managers` discretion.
• Low costs - Saves on the cost of research and frequent portfolio churn. Maximum expenses capped @ 1.5%.
• Low costs - The scheme invests as per the index and sticks to the mandate.
• Difficult to outperform - Globally, over 3 and 5 years, S&P 500 has beaten 64.9% of the large-cap funds, and the S&P Midcap 400 has outperformed 80.5% of midcap funds.*

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