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Which is a Better Index to Invest In?

When choosing a passive fund to invest, the selection often comes down to major  two options — Nifty50 funds and Sensex funds. Both the indices fall under the large  cap category but have indistinctive differences. 

These major difference arises in the composition of the comparable indices. Sensex  is made up of 31 top stocks while Nifty50 comprises 50

So, the question pinned here is which one should ideally choose for investments? 

Going by the history, the decision doesn’t signify in the long run. If one looks at data of the last decade, both Nifty and Sensex have delivered almost similar returns at  around 265% and 267% respectively. Even if the light is focused on the short period,  the returns aren’t much different too. During the last year, Nifty has up trended 52% and Sensex has risen 50%. 

There are various stocks that dominate both the indices may be the reason why the  difference in components does not brings varied returns. If one looks at the  composition, the top stocks which enjoy larger weightages are more or less the same  in both the indices. The unique stocks are on the low weightage side and hence do  not have much impact on the performance of the indices. 

The other question arises here that is there any difference between the both from investment perspective? 

The lower concentration risk is the one and only factor that makes Nifty50 a slightly  better option. The broader the index, the lower is the risk of concentration. It’s  not suggested to choose a least diversified index that brings high concentration risk. 

However, it isn’t again a major affecting constituent. The Nifty is governed by the  stocks that attribute in Sensex as well. The remaining stocks in Nifty carry lower  weightage often less than 1% and hence have marginal hold on the index’s  performance. 

VSRK don’t suggest one over the other. Seeing through the past data, there’s hardly  any difference in returns.

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