Which is a better index fund — Sensex or Nifty?

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

These differences arise from the composition of the two indices. Sensex is made up of 31 top stocks while Nifty50 comprises 50.

So, which one should you ideally go for?

Going by past data, the choice won’t matter in the long run. If you look at 10-year data, Nifty and Sensex have delivered more or less similar returns at 265% and 267%, respectively. Even from a short-term perspective, the returns aren’t much different. In the last one year, Nifty has surged 52% and Sensex has risen 50%.

The reason why the difference in constituents does not translates into varied returns is the fact that the same stocks dominate both the indices. If you look at the composition, the top stocks which enjoy larger weightages are more or less the same in both the indices. The ones that are unique have very low weightages and hence do not have much impact on the performance of the indices.

Is there no difference between the two from investment perspective?

There’s one factor that makes Nifty50 a slightly better option. It’s lower concentration risk. The narrower the index, the higher is the risk of concentration. Given that the returns are more or less similar, it’s better to opt for a more diversified index that has lower concentration risk.

However, it isn’t a big factor. The Nifty is dominated by the stocks that feature in Sensex as well. Those that are extra in Nifty carry lower weight (often less than 1%) and hence have marginal hold on the index’s performance.

According to Hemen Bhatia, Deputy-Head ETF at Nippon India MF, the choice of index makes little difference to the returns. “Generally, we don’t suggest one over the other. Historically, there’s hardly any difference in returns. However, Nifty is a bit better because it’s more broad based. Sensex is only 31 companies so it becomes a bit more concentrated compared to Nifty50,” he said.