Don’t trust this Sensex, it’s just an index

MUMBAI: As the Sensex gets older, researchers are debunking the idea of index-based investments. They are increasingly telling clients that Sensex is not a tool to make money. Their reasoning: just the top five of the 30 Sensex stocks disproportionately enjoy a cumulative  42.58% weight.

These stocks are: Reliance Industries (11.54%), Infosys Technologies (10.95%), ICICI Bank (9.68%), Bharti Airtel (5.25%) and ITC (5.16%).

Plus, there are quite a few Sensex stocks that have become expensive over the past couple of years, considering the fact they are non-performing in terms of valuation.

Investors make money when earnings per share (EPS) rises and more money when both the EPS and price-to-earnings ratio (PE) rises, but these stocks have not seen any major growth  in these parameters during the last couple of years.

“We are not comfortable with anything that is to do with the Sensex. More so, because the composition of the Sensex is set for a change soon,” says Arun Kejriwal, director, Kejriwal Research.

Another reason researchers offer to prove that Sensex is no longer an investment tool is that constituent stocks enjoy valuations disproportionate to their contribution to the economy.

Says Kejriwal: “Reliance Communications and Bharti Telecom enjoy weightages of 3.44 and 5.25, respectively. That is much more than their contribution to the economy.” The message: do not buy the basket if you want to outperform the basket.

As scores of fund managers continue to swear by Sensex P/Es, researchers run them down, saying that the former do so as it is easy to manipulate portfolios comprising just 30 Sensex stocks.

Plus, research on them is readily available, since they are over-researched. Asks Vishal Khandelwal, head of research, Quantum Info Services: “Why narrow down your tracking and invest in just 30 stocks?”

Investing by the Sensex, say researchers, are fraught with more risks. For instance, the recent customs duty cut in cement. When the cut was announced, most cement stocks dipped between 6% and 9%, and the next day, they were all up by about 2%. If the Sensex was the yardstick, it would not have revealed anything sensible.

So, the message is simple: investing is all about managing the risk-reward equation intelligently. That is why researchers are increasingly advising their clients to make more money in mid-cap stocks. These stocks enjoy just half the Sensex PE multiple. They might be riskier, but more rewarding.