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Sensex and Nifty indices - Are they the right Benchmarks for mutualfunds in India?

Author

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  • Kumar SSS

    (Indian Institute of Management Kozhikode)

Abstract

Recently two significant developments took place in the Indian capital markets -(1)SEBI's decision making it mandatory for all mutual funds to disclose the scheme returns against a common benchmark index like Nifty or Sensex and (2) Employee Provident Fund Organization (EPFO) is permitted to invest a part of their funds in to stock market through the exchange traded fund (ETF) route particularly SBI Sensex and SBI Nifty ETF's. Both the developments are tied by a common concept that stock market indices like Nifty and Sensex are passive without any statistically significant alpha. In the fund management industry, alpha is a measure of the risk adjusted excess returns from a portfolio that can be attributed to the stock picking skills of a fund manager. In this paper an attempt is made to examine to check for the presence of significant alphas in the returns of both the indices. The results of the study indicate that both the indices have statistically significant excess returns raising questions on their suitability to act as reference and/or benchmarks for evaluating performance of mutual funds in India. Further, the study examined the returns of SBI Sensex ETF and observed a statistically significant alpha. The results of the study have important implications not only for the index construction companies but also to the policymakers who are advocating investment of considerable amounts of provident fund money in to stock market through exchange traded funds linked to Sensex and Nifty. Index maintenance companies have to re-design the indices so that they remain passive and the EPFOAdministration may rethink their decision to invest in the existing ETFs linked to the Sensexand Nifty indices and should consider constructing a well-diversified stock portfolio that is truly passive so that their mandate to get exposure only to market risk is fulfilled.

Suggested Citation

  • Kumar SSS, 2017. "Sensex and Nifty indices - Are they the right Benchmarks for mutualfunds in India?," Working papers 244, Indian Institute of Management Kozhikode.
    • Handle: RePEc:iik:wpaper:244
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    References listed on IDEAS

    as
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    2. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
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