During the peak of mutual fund sales in 2017 and 2018, one of the arguments put forth by the advocates of shares and mutual funds was:

If a person had invested Rs. 100 in 1979 in a SENSEX Fund, today with the SENSEX at nearly 40,000, Rs. 100 invested in 1979 would be worth Rs. 40,00,000.

This statistic is told to innocent investors who readily believe in such a possibility. This is another case of mis-selling and fraud. To know why we must understand how the SENSEX is constructed.

The Composition of the SENSEX

The SENSEX is an Index. An Index of share price movements helps analysts to understand how the market is performing in comparison to the past. The SENSEX started in 1986, with 1979 as the base year. In the base year, the Index is 100. In subsequent years an increase in share prices results in a rise in the Index, while a decrease in share prices results in a drop in the Index value. The SENSEX is an Index with a basket of 30 companies, which are the most actively traded shares on the Bombay Stock Exchange. Since actively traded stocks are included in the SENSEX, by definition, the shares that are the most traded shares undergoes a change from time to time. Mint, 24 April, 2019, reported that between 1988 till 2018, in a span of 30 years, the SENSEX has undergone many changes in its composition. Companies have entered the SENSEX and many have also exited the SENSEX. Mint reports that during these 30 years only 7 companies have remained in the SENSEX throughout the period. The 7 companies are: Mahindra and Mahindra, Tata Motors, Tata Steel, Reliance Industries, Hindustan Unilever, ITC and Larson & Toubro.

Many companies (that were part of the SENSEX in the earlier years) such as Hindustan Motors, Premier Automobiles, Century Textiles, Mukund Iron and Steel, etc. have either closed down or have been merged with other companies. Other companies such as Bombay Dyeing, GSK Pharmaceuticals (Glaxo), Tata Chemicals, Reliance Infrastructure, Jayaprakash Associates, Sterlite Industries, Bharat Heavy Electricals, Satyam Computers, etc. are not performing as well as they did before and are therefore not part of the SENSEX today.

At one time the SENSEX had many textile companies such as Bombay Dyeing, Century Textiles, Grasim, Futura Polysters. In 2018 there is not one textile company in the SENSEX. In 1988 there was not a single bank or finance company in the SENSEX, in 2018 however 9 banks and finance companies were included in the SENSEX.

It is a losing proposition

The SENSEX is therefore always in a state of change. In such a situation unless there is fund that exactly mimics the SENSEX proportions and weights attached to each share in the SENSEX basket, the Rs. 100 invested in 1979 or in 1986, would long ago have vanished and the entire Rs. 100 would have been lost. There is no question of earning Rs. 40,00,000 today from a Rs. 100 invested in 1979.

Hence investing in the SENSEX when it started in 1986 is a bad investment advice and it is being advised by persons who are supposedly knowledgeable about matters to do with shares and investments. Knowingly if facts are twisted, it is with an intention to fraud. This is another instance of selling high risk investments fraudulently.

SENSEX has a limited analytical value

Since we are on the subject of SENSEX, I would also like to inform you on the usefulness of the SENSEX as an index that shows the share market performance. Approximately 5000 companies are listed on the Bombay Stock Exchange (BSE). The performance of the companies on the stock exchange is the share price movement of all 5000 companies, taken individually. However from a practical angle, to analyze the share market performance it is difficult to keep a track of all 5000 companies. So indices are created, using statistical techniques. Indices are easier to keep track of.

SENSEX is an index of 30 of the most traded shares on the BSE. An index of 30 companies can hardly be said to be indicative of the whole market. SENSEX is skewed in favor of the performing stocks. It does not represent the market as a whole. To capture the market performance in a manner that is more representative of the actual performance the index must comprise of larger numbers. There are other indices to meet this need, such as the S&P BSE 100 (comprising of 100 companies), the S&P BSE 500 (comprising of 500 companies) and so on.

In addition there are sector indices for individual sectors. For example there is a Banking Index for the banking sector, there is a Pharmaceutical Index for the pharmaceutical sector and so on.

Share market analysts refer to the indices that have larger number of companies or the sector indices to analyze the share markets. SENSEX does not give a comprehensive view of the market sentiments, though it certainly tells you the sentiment regarding the 30 companies in the basket. For some reason SENSEX in popular sentiment has come to define the performance of the entire share market. This however is not right.

Tell your customers about SENSEX

So next time someone tells you that you would have made money by investing in the SENSEX in 1979, and suggest that even now it is not too late, remember that the advice is fraudulent. A lot of money cannot be made for the asking in the share market or the indices that represent the shares being traded in the share market. You may also want to read my article (click on the link) “And the Tortoise Wins” in this Blog to learn another reason why investing in the SENSEX can potentially lead to loses.

Do not forget to train your team and your colleagues on this point. Finance is a scientific subject and it is important to stick to science in order to know the truth on many financial matters. This will help us sell ethically.