Broad market indices are essential tools for market analysis and portfolio benchmarking. The indices offer a comprehensive perspective of the equity market by tracking companies across diverse sectors and market-capitalisation segments.
In this article, we will look at how the broad market indices work and how they can come in handy for investors.
Key Takeaways
- Broad market indices track companies across multiple sectors and market-capitalisation brackets.
- They provide a broader view of equity market performance compared to narrow, sector-specific indexes.
- Major Indian benchmarks include the NIFTY 50, NIFTY 100, NIFTY 200, and NIFTY 500.
- Investors and fund managers use these indices to measure and benchmark portfolio returns.
- Index mutual funds and exchange-traded funds (ETFs) allow investors to track these broad indices passively.
What are Broad Market Indices?
A broad market index is one that tracks companies across multiple sectors and market-capitalisation brackets, rather than being limited to a single industry. As NSE India describes it, broad market indices consist of the large, liquid stocks listed on the exchange and serve as a benchmark for measuring the performance of stocks or portfolios, such as mutual fund investments.
In India, the NIFTY 50, NIFTY 100, NIFTY 200, and NIFTY 500 are examples of broad market indices. In contrast, NIFTY IT and NIFTY Bank focus on just one sector, so they are called sectoral indices.
Broad market indices act as the underlying benchmarks for most index mutual funds and ETFs and are widely used as a reference point for gauging overall equity market direction.
How do Broad Market Indices Work?
Broad market indices follow a strict methodology that dictates eligibility criteria, individual company weights, and the frequency of periodic reviews.
A key component is market capitalisation, which means the total market value of a company’s outstanding shares.
Major indices calculate company weights based on free-float market capitalisation, which considers only the shares available for public trading. Larger companies carry a heavier weight and exert a stronger influence on index movements.
Also Read About: Types of Stock Market Indices
Why are Broad Market Indices Important?
- Benchmarking performance: Investors compare their portfolio returns against an appropriate market index (e.g., evaluating a 12% portfolio return against a 15% benchmark) to assess strategy effectiveness.
- Understanding market direction: They offer a snapshot of overall market momentum, highlighting which sectors or companies are driving trends.
- Built-in diversification: By including businesses across various sectors, broad indices spread exposure, reducing reliance on a single company or industry.
- Supporting passive investing: They serve as the underlying assets for index funds and ETFs, enabling efficient basket investing without individual stock picking.
Note: Diversification reduces company-specific risk but cannot eliminate macro market risk.
Major Broad Market Indices in India
The NSE categorises several indices under its broad market umbrella, with four main variants representing different levels of coverage:
|
Index |
Number of Companies |
Main Coverage |
|
NIFTY 50 |
50 |
Major diversified large-cap companies |
|
NIFTY 100 |
100 |
Extended large-cap companies |
|
NIFTY 200 |
200 |
Large and mid-cap companies |
|
NIFTY 500 |
500 |
Wider multi-cap market coverage |
-
NIFTY 50: Comprises 50 diversified stocks across 13 economic sectors. It provides a concentrated view of large-cap market leaders.
-
NIFTY 100: Tracks the 100 largest companies by full market capitalisation from the NIFTY 500 universe, combining the NIFTY 50 and NIFTY Next 50.
-
NIFTY 200: Includes companies from both the NIFTY 100 and NIFTY Midcap 100, targeting established large- and mid-cap enterprises.
-
NIFTY 500: Captures the weighted average performance of the top 500 NSE-listed companies, providing the widest representation of the Indian equity market.
Apart from these, the other broad market indices are:
Extended & Total Market Indices
-
NIFTY Next 50: Tracks the 50 large-cap companies just after the NIFTY 50.
-
NIFTY Next 100: Monitors the next tier of large-cap contenders.
-
NIFTY Total Market Index: Captures the comprehensive performance across micro, small, mid, and large-cap segments.
Multi-Cap & Strategy Broad Indices
-
NIFTY 500 Multicap 50:25:25: Allocates fixed weights across large-cap, mid-cap, and small-cap universes.
-
NIFTY 500 LargeMidSmall Equal-Cap Weighted: Gives equal weight to constituents across all size segments rather than depending entirely on market capitalisation.
-
NIFTY India FPI 150: Focuses on companies with high Foreign Portfolio Investor (FPI) interest.
Midcap Indices
-
NIFTY Midcap 50/Midcap 100/Midcap 150: Track medium-sized companies ranging from the top 50 up to the top 150 players in the mid-cap segment.
-
NIFTY Midcap Select: Measures a targeted basket of liquid mid-cap stocks.
Smallcap & Microcap Indices
-
NIFTY Smallcap 50/Smallcap 100/Smallcap 250/Smallcap 500: Provide granular coverage of small-sized businesses scaling up from the top 50 down to the top 500.
-
NIFTY Microcap 250: Focuses on the segment of companies below small-caps, representing micro-enterprises.
Composite & Hybrid Broad Indices
-
NIFTY LargeMidcap 250: Combines large-cap and mid-cap indices into a single blended portfolio.
-
NIFTY MidSmallcap 400/MidSmallcap 400 50:50: Blends mid-cap and small-cap stocks together to offer joint coverage of the non-large-cap economy.
How are Broad Market Indices Different from Sectoral Indices?
| Parameter | Broad Market Index | Sectoral Index |
| Coverage | Multiple sectors | Specific sector (e.g., IT, Banking) |
| Diversification | Generally wider | More concentrated |
| Main Purpose | Track aggregate market performance | Track industry-specific performance |
| Example | NIFTY 500 | NIFTY IT |
How Can Investors Access Broad Market Indices?
Investors typically gain exposure to a broad market index through these routes:
1. Index mutual funds: These schemes replicate the index's constituents and can generally be bought and sold without a demat account, using either a lump sum or a Systematic Investment Plan (SIP).
2. Exchange-traded funds (ETFs): ETFs tracking the index are bought and sold on the exchange like a share, so this route requires a demat and trading account with a SEBI-registered broker; purchased units are then credited to the investor's demat account.
3. Direct replication: Investors who already hold a demat and trading account can buy the index's constituent stocks individually. They can hold them in the same proportion as the index weights, but it may need more capital and ongoing rebalancing effort.
Conclusion
Broad market indices are designed to provide investors with a broader perspective on the equity market, covering companies across various sectors and market-capitalisation segments. Knowing these indices can help investors compare portfolios, track market performance, and select suitable benchmarks for their investment analysis.
