Nifty Index Or Individual Stocks, Who Performed Better?

Comparison of the Nifty 50 Index and its constituent stocks

Anyone who has been following the blog for a bit would have seen my proclivity towards the index.

Since we are coming towards the end of the year (2021), I wanted to do a summary kind of post.

2021 has seen a serious surge in stock markets and has given astounding returns by all counts. The last 2-3 weeks have been a bit of a dampner but otherwise, the last 12 months have been quite spectacular.

About the Index, Nifty 50

So, here is a brief look at the Nifty Index and its constituents. As you all know, the Nifty is made up of the top 50 stocks by market capitalisation. The Nifty index is weighted by market cap. The biggest companies make the biggest impact on the way the index moves.

The index is reviewed twice a year, Jan & July. The top 50 companies in the trailing 6 months are picked to form the Nifty 50 Index.

You can look up this factsheet on Nifty 50.

Here is the list of the Nifty 50 stocks as of Nov 2021.

Now that we have the basics of the index, let us look at the performance of the constituents.

I have pulled data from www.Investing.in. I found this to be quite a useful site, for anyone interested in doing more research.

This is a thumb-rule level analysis, so it might have minor inaccuracies. This is not to be used as investment advice.

Nifty index vs Nifty stocks

I looked up the performance of the 50 Nifty stocks over the last 1 year.

A few standouts:

• 33 of the 50 stocks have given better than 10% returns
• 9 stocks have given negative returns year to date
• 11 stocks have given better than 50% returns
• 28 of the 50 stocks have done better than the Index in the last year
  

The Nifty itself has given us 32% return over the last 1 year. This is accounting for the drop in the last 2 weeks. At its peak, the return was more than 40%.

The most interesting thing I found was that of the top 10 highest weighted stocks only 4 have performed better than the index. Of the top 5, only Infy and ICICI have done better than the index.
So, 6 of the 10 largest companies in the country have performed worse than the market. However, investing in the index would still have given you 32% returns.

The fact that the top companies performing below par yet receiving 32% returns over the year is a solid argument in favour of Index investing.

If I were to pick stocks to invest then HDFC Bank, TCS and Reliance would definitely have been part of my portfolio. It is hard to imagine that I would have a large-cap portfolio that would return more than 32% looking at last year’s performance.

My preference is to stick to the index

I have always leaned toward the index. The performance of individual stocks and the index over the last year have given further conviction.

To round off the Index story, the Nifty Next 50 has given a 1-year return of 39%. The probability of my picking winners in the next 50 is even lower than in the top 10.

With equal weighted investments in Nifty 50 and Next 50, you would have returns of 35%+ in 2021 so far.
If you have a crystal ball that tells you the stock winners, then you should definitely pick stocks. Please DM me if you have one ;-). If not, then I would recommend investing in the Index (or indices) as a means to get market-level performance.

The year 2021 data is not an aberration. You could do this same analysis over any period and you are likely to draw the same conclusion. A year is usually too short a period for such a comparison, but longer periods will lean even more in favour of index investing.

For further reading, this article on Index Investing has further details and a comparison to Mutual Funds. Of course, I would encourage everyone to start with the very basics and the ten fundamentals.

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.