Category: Investments

One of the themes that I’ve had trouble thinking through in the past is if a person living in India should invest in developed equity markets like the US, and if so then by what percentage?

For a long time, I used to think that investing in the NASDAQ or S&P 500 will not be meaningful for Indian investors because although these markets are a lot more stable – the returns over a long period just about match what you get in a fixed deposit in India. Combine the dismal performance that these markets had over the last decade with the great returns that emerging countries have had – and you don’t find many takers for investment in the Nasdaq or any of the German, Canadian, Australian or even South Korean indices.

In fact if you look at the list of the international mutual funds available to Indians – you will find that it is loaded with funds from other emerging countries and thematic investments, but only the MOST N100 – Motilal’s Nasdaq ETF is the one that gives you international exposure to a developed market’s index. I think this should also be one of the best performing funds this year returning 14% year to date.

If you look at the performance of the major global indices this year – you will find that the emerging countries have fallen a lot more than the developed ones, and I think you will find that true for most periods in history.

via chartsbin.com

The economic events that have unfolded this year have influenced my thinking from being in a position where I didn’t see any value in investing in US or Germany to being interested in such investments in a moderate manner if you can access a low cost fund. Unfortunately, most funds right now are fund of funds and that too with high fee and they will do no good for getting exposure to international markets.

But something like a Nasdaq ETF or another instrument that gives exposure to the Canadian or Australian market can be useful to protect from volatility and also participate in the upside when it occurs.

Dev left a very good comment on yesterday’s post about the best dividend paying stocks which said that while it’s good to have the list of current yields, it’s also important to look at the consistency with which these companies have paid dividends.

That is a very valid point and I took a look at the dividend paying history of all the stocks that I mentioned yesterday plus SCI which has a very good yield, was present in my earlier posts but I somehow missed yesterday. Thanks to Mr. VKD Menon to point that out.

I’ve taken the dividend history data from the NSE website, and right now I think that’s the best source to get this data. You can find calculated dividend yields on other websites, but I’ve found a lot of the numbers to be inaccurate, and that’s primarily the reason I didn’t use any website but rather took the share price and dividend paid and then calculated the numbers myself.

With that said, here is the table that contains the dividend paying histories of some of the best dividend paying companies in India. (Click to enlarge)

The quarters in the above chart are based on calendar years for ease of use, and when I’ve used percentages it’s because there was a share split or bonus in the share and the NSE website listed the dividend as a percentage of face value instead of the amount, and that may be inaccurate.

Looking at this data shows that while most of these companies have been consistent dividend payers – India Bulls and Sun TV has hiked the dividends only recently, and you never know if that will continue or not. Even Cummins India has had a good dividend payout this year but the only other year when the dividends have been these high was 2009.

I don’t notice anything unusual in any of the other stocks, but if you do then please do leave a comment.

About three months ago I did a couple of posts on the top 100 and top 200 high dividend yield shares in India. I wanted to cover the next 200 shares or so as well, but since the market has been quite choppy in the last 3 months I wanted to see if any of the original high dividend yield shares have gone down to levels that make the yields very attractive.

I looked at the all the high dividend yield shares from those two posts, and removed the ones that didn’t have any dividend paid at all in 2011.

After that I took the price of today’s close and re-calculated the dividend yields on each of these stocks. I then took the shares which had more than a 3.00% dividend yield and went to MoneySights to get the market capitalization, P/E ratio and Debt / Equity ratio of these shares.

Here is what the result looks like.

Company	Close Price	Dividend Paid	Dividend Yield	Market Cap	P/E Ratio	Debt Equity Ratio
SCI	56.15	5.50	9.80%	  2,618.00	    Loss	0.66
INDIABULLS	145.55	11	7.56%	4,530.00	6.65	3.17
ANDHRA BANK	93.25	5.5	5.90%	5,218.00	3.79	–
GUJARA NRE COKE	17.25	1	5.80%	905.00	8.23	0.67
INDIAN OVERSEAS BANK	86.45	5	5.78%	5,349.00	4.84	–
HERO MOTORS	2003.45	110	5.49%	40,006.00	18.87	0.5
UCO BANK	60.9	3	4.93%	3,822.00	3.44	0.35
VIJAYA BANK	53	2.5	4.72%	2,500.00	5.01	0.36
Bajaj Holdings	688	35	4.36%	7,657.00	10.04	–
ORIENTAL BK	252.45	10.4	4.12%	7,366.00	5.73	–
VST Industries	1125.00	45	4.00%	1729.00	14.69	–
ALLAHABAD BK	151.35	6	3.96%	7,208.00	4.47	–
INDIAN BANK	189.35	7.5	3.96%	8,138.00	4.52	–
SYNDICATE	94.3	3.7	3.92%	5,406.00	4.44	–
CUMMINS INDIA	337	13	3.86%	9,342.00	15.89	–
RENUKA SUGAR	28.45	1	3.51%	1,910.00	38.65	0.74
DENA BANK	63	2.2	3.49%	2,100.00	2.93	–
SUN TVNET	262.65	10	3.33%	10,351.00	13.04

 

As you can see there are a fair number of large companies that have decent dividend yields, low P/Es and low Debt / Equity ratio. I’ve only looked at large companies and used the Debt / Equity ratio because that indicates stability and the chances of these companies going bankrupt and the share price going to zero is lower than smaller companies with high debt on their books.

P/E ratio is a quick measure of finding out if the share is over priced or not, and that’s the reason I’ve included that in this table.

I’ll continue to add to this list and if you know any good dividend yield shares not present here please do leave a comment and I’ll include them here.

Just looking at this table – I don’t think any company stands out as too good to miss which is what I was hoping for when I started to create this list.

Another thought on this list is that it is not as useful as a list of high dividend yield stocks in the US because it is primarily dominated by banks and if you don’t want to take exposure to that sector then there aren’t many options outside that.

Update: VKD Menon emailed that SCI was missing from this list and I’ve added it now. 

As the investment climate turns more pessimistic by the day – more and more people are turning away from the stock market – and I’m being asked by friends why I continue to remain bullish when there is so much bad news coming in from all directions.

The answer to that is I’m not bullish in the sense that the market will go up next month or next year or in any other ways that people generally think about being bullish. Yes, I’ve bought stocks in the last few months, and will continue to do so in the coming months, but the reason for that is not because I’m bullish in the sense that most people think about it.

I have no idea where the market will be next month or next year or two years down the line, but I do believe that companies will continue to exist and make profits many many years down the line, and as long as I invest in companies that don’t go bankrupt and with money that I won’t need in a hurry I think I will come out fine.

I recently re-read some parts of The Intelligent Investor, which is of course considered the bible of value investing, and I think two excerpts from the book capture how I feel quite nicely.

Here is the first one:

A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price. The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists.

Except for the first one or two years of investing when I was still in college – I’ve viewed stocks as representatives of companies and that makes it a lot easier to go through all the volatility that exists in the market today, and has always existed.

I think this mindset improves the chances of investing success phenomenally but I have no illusions of never making any mistakes, and I’m pretty sure there will be some mistakes and that’s really not in my control. I can’t be error free but I can diversify in a way such that those errors are not very costly.

Jason Zweig has added commentary to the issue of The Intelligent Investor I currently have, and I think this excerpt captures the essence of what I want to say about errors quite nicely.

The probability of making at least one mistake at some point in your investing lifetime is virtually 100%, and those odds are entirely out of your control. However, you do have control over the consequences of being wrong. Many “investors” put essentially all of their money into dot-com stocks in 1999; an online survey of 1,338 Americans by Money Magazine in 1999 found that nearly one-tenth of them had at least 85% of their money in Internet stocks. By ignoring Graham’s call for a margin of safety, these people took the wrong side of Pascal’s wager. Certain that they knew the probabilities of being right, they did nothing to protect themselves against the consequences of being wrong

In my opinion – I can be wrong about two things – first about investing in stocks itself – five years down the line I could find that companies aren’t making profits any longer or less than they were five years ago and the macro situation was so bad that stock prices are just a third of what they were a few years ago. And to get away from this risk one could invest in debt instruments, real estate, gold or just keep cash – basically not invest 100% in stocks.

The second risk is stock specific risk and to get away from that you can invest in multiple stocks and especially stocks that have been around for decades, have low debt, high dividends and good fundamentals. This will at least minimize the chances of bankruptcy and if you have ten stocks in different sectors or large cap diversified mutual funds then you are protected from stock specific risk quite easily.

I’m not a market trader and I don’t pretend to understand everything that’s happening in Europe or how it will play out in the future – but I do know what has worked for me in the past and I have high confidence that companies that have been around for decades will continue to exist in the future as well and make profits. At this point, this is enough to make me interested in stocks, and be bullish as they say.

Over the weekend I got an email from a reader who had a question on how to identify under – performing mutual funds, and in what way should one get rid of them.

I think this is a difficult question, and I don’t think there are any straightforward answers to it, but there are certain things that do come to mind.

Before getting to those things though, you need to ensure that you really are comparing the fund to its peers and not being harsh on it.

Remember, that an equity fund will only go up if the stock market has been up, and you can’t punish an equity fund for being down if the whole market is down. Small caps generally fall a lot more than large caps, so in down markets you will find that funds based on small caps are also down a lot more, and that’s not really a sign of under performance. The mutual fund is supposed to own small caps, and if it’s down as a result of that – then that’s really not the problem of the fund.

You need to evaluate the mutual fund against its peer group and if it has been down in that peer group, then that’s a sign of under performance, not otherwise.

Now, let’s look at some things that you can do to sniff out under performance, and let’s start with the obvious things first.

Was the fund sold to you?

I think the first thing you need to look at is why you bought a particular mutual fund, and have the conditions that existed when you bought the fund changed now. Looking at the huge volumes that mutual fund NFOs get, I think there are a lot of people who don’t really buy mutual funds, but they get sold to them.

If you have a fund that got sold to you, then it’s a good idea to evaluate how well it has done compared to its peers, and if there are other options with longer histories, and better performance then it makes sense to switch to those.

New information about the fund manager

If you bought the fund because of the fund manager and you find out some new information about the fund manager that makes you view him in a different light then that’s probably a sign of re-evaluating your decisions.

For example, Sandip Sabharwal is a well known fund manager in India and blogs as well. In going through his blog – I read a post where he discusses financial astrology and that made me view him in a completely different light, and I don’t think I will ever invest in a fund that he manages.

Thin Volumes

It’s always better to be in a fund with good volumes and a decent volume of assets under their management so if you are in a diversified large cap mutual fund which has just a fourth of the assets that another fund of similar type has, then it’s probably better to switch to that fund.

These were some obvious things, but what if the mutual fund has been a consistent performer in the past, but has started doing badly recently?

Is it high cost?

Look at the expense ratio of the peers and compare it with your fund – if it’s too high then that may as well be a reason of why the fund isn’t performing well.

If the fund expense ratio is high then that itself takes a big toll on the fund performance and it’s better to switch to low cost funds.

So, if you had something like HDFC Top 200, which is a good fund and you saw that it started under performing the market – how do you know whether you should give it the benefit of the doubt or should get rid of it?

If such a thing were to happen to one of my holdings, then I would like to see if the fund manager changed or not, and if they didn’t then I’d like to continue holding the funds, and give the fund manager the benefit of the doubt. But for how long? I will probably stick three years or so and in that time start investment with another fund as well, but I think if you have a shorter period then it is likely that you keep chasing one high return fund after the other.

I’d much rather be in a few high performing funds to start with, and that way the chances of all of them turning down at the same time reduces. There is no science behind this number of three years, just a feeling that this number is neither too short nor too long, and is a reasonable time frame.

I think a large part of the gains you get from equity will be because the market itself has done well, and a good fund manager may be able to juice up the return a bit but asset allocation and being in the market itself through decent funds is a more practical and achievable goal than trying to find the best fund within a category.

This is a very common question here, and I feel rather exasperated when I encounter this question but I’ve never actually written a detailed post on why that is.

Since, the new year will come soon, and a common variation of this question: Which is the best place to invest in 2012 will be asked a lot – I thought this is a good time to do a post on this subject.

First, you need to define what you mean by the best place to invest. Obviously, you’re not thinking of the safest place to invest because almost all of us treat our bank deposits as ultra safe and backed by the government implicitly so I assume that you wouldn’t bother to ask this question if safety of money was your primary concern.

Returns are what most people have in mind when they ask about the best place to invest, and the real question is what will give me the highest return without any risk of losing money?

Let’s take a look at the returns of gold (GoldBeeS ETF), equities (Nifty) and fixed deposit for the last 5 calendar years. I’ve taken year to date returns for 2011, and I’ve taken data from April onwards for 2007 since that’s when GoldBeeS listed.

Now, one look at the above chart tells you what the best investment for 2011 would have been – gold of course.

And 2010 – that’s gold too. But look at 2009 – whoa! Look at the Nifty skyscraper shoot through to the sky – if you missed being in equities in 2009 – you missed that skyscraper and certainly a lot of people missed that because of what happened in 2008.

And 2008? Well, your first instinct is to say that gold did the best in 2008, but I would say someone who sold Nifty Futures did far better than people who held gold in 2008.

So, the best investment in 2008 was short Nifty.

And look at 2007 – there you go – Nifty makes massive gains again and outperforms everyone.

Now, these are just three investment classes, but there are plenty more options like real estate and silver, and then within equities you have sectoral mutual funds, and the way you slice and dice the investment options are just endless.

In my mind, the big idea that emerges from this chart is that every year something else is the best, and that’s also true for a slightly longer periods of 3 – 5 years as well.

There is simply no way to tell what’s the best investment for the next year or the next 3 – 5 years.

If you keep getting in and out from one asset class to another in the hopes of chasing the best returns – you will easily miss out rallies and burn your fingers because the time you enter a new asset is usually the time when a lot of euphoria surrounds that asset and it actually falls in value. That hasn’t happened to gold yet, but I won’t be surprised if that happens in the near future, as near as next year.

I would never put all my eggs in one basket, and risk the chance of seeing a 50% crash in the value of my money or get out of the market completely and see it rocket its way to the top.

There is no such thing as “best investment” just like there is no such thing as return without risk.

One thing that confounds me about the current market sentiment is that the market fall itself is only 20% or so, which is a lot less than the one we witnessed in the last crash but the panic seems to be at least as much as the last time.

One reason for that is the people who “play” the market generally invest in mid – caps, smaller caps, penny stocks and other momentum stocks, which have obviously fallen a lot more than the broader indices.

The two common reactions to such falls are either booking losses, and shunning the market completely, or to average down your purchase by buying more of the same stock.

Both of them are bad ideas, but averaging down on penny stocks or companies with bad fundamentals is worse than shunning the market altogether because you are throwing good money after bad.

I’ve always been wary of averaging because most of the times it becomes a good excuse to hide losses, and I think this is especially true if you hold a penny stock, or some other lesser known small cap that has fallen quite dramatically.

Ultimately, you want to invest in whatever you feel will grow the most from this point onwards and not what has fallen the most already!

This is another one of those easy to say – hard to do things, and I’m fully aware of how difficult it is to actually execute because I’ve faced it myself.

I think a big part of getting over this feeling is to acknowledge that you will make mistakes in picking your stocks like everyone else, and get on with it.

Some people take these losses personally, and their ego hurts, but they overlook the fact that everyone makes mistakes and gets it wrong some of the times. You won’t find examples of mistakes among your friends and relatives because they don’t like to talk about it, but if you look at the portfolio of any active mutual fund – you will find stocks that haven’t performed well, and that clearly shows that even professionals make mistakes.

If you start from a position where you say to yourself – you are going to be wrong in some of these calls – it’s a lot easier to deal with it after such an event occurs.

If you find yourself in the situation I described above, this is also a good time to assess whether in fact it makes more sense for you to invest in diversified mutual funds rather than taking stock positions directly.

This post is drawn from a topic posted in the Suggest a Topic page, but the original comment wanted a convincing answer to this question, and I don’t think I have one, but I’ll still attempt to address the question with some thoughts I do have.

First, here is the comment.

I like your articles very much – they are very informative. Keep up the good work!
I have a query – please try to give a convincing answer if possible.
I invest in mutual funds by SIP only and in stocks directly. My SIP in mutual funds are for long periods – ten to fifteen years. I have read a lot on rupee cost averaging and the power of compounding but I am not convinced whether I should let a SIP in a particular MF run for so many years or book profits in between. I review my portfolio every six months. What if the SIP
ran for so many years and finally the MF performance plummets as it happened to
SBI MSFU Contra and Reliance Growth funds? I had been investing in these MFs for the past five years but feel that I should have booked profits earlier.

I touched upon this topic nearly 3 years ago in a post titled Buy and Hold. And Sell?.

If I were to write that post today I would get rid of the question mark. I wrote the following thing in that post:

Don’t forget to sell

Calling a market top is almost impossible, but it is fairly easy to see when markets over-heat. Instead of holding on to stocks perennially, you should sell, when the market is over-heated. There is no reason tonot do this.

When stock prices reach levels that do not justify the earnings of the companies they represent, there is no reason to hold on to the stocks. You should convert your stocks into cash in such times.

From 3 years to now – that conviction has only become stronger – the only thing that surprised me was the speed with which the market turned after the crash. While buying stocks during the ultra depressing time of late 2008 and early 2009 – I used to think that it might take a few years for the situation to get stabilized and earnings will grow then and as a result the stock prices will grow as well.

The turn came much sooner, and then the markets fell this year as well although the fall is not even 20% YTD – all the gloom and doom stories make it sound much worse.

I think when you are sitting on fat profits you should book some of it especially when your postman starts giving you stock advice.

You can take that money to meet major expenses or put some of it in debt instruments to take advantage of high interest rates like you see today, or keep stashing the cash so that you can take advantage of getting in the market when it crashes the next time.

All of these things are much easier said than done, and a lot of it depends on your own conviction and confidence about what you are doing. There is a reason why everyone sells in a panic and buys during euphoria.

You can see this around you now when the Sensex is down almost 20% YTD – how many people are really buying aggressively?

But ultimately, I think you want to be at the place where you are confident in making decisions to book profits, and also increasing your equity holdings during time of distress, and of course knowing the rationale behind it. You don’t want to just buy because there is distress.

I bought equities aggressively in late 2008, early 2009, and that’s what I’m doing right now. Not everyone will think it’s the right thing to do because of their confidence in the market, need for cash in the near future, or even opportunities and I can certainly understand that.

Those are my thoughts, I don’t for a minute think they are “convincing” because I think it’s one of those things that is a lot harder to do than to talk about – if it weren’t – everyone would be doing it.

I did a series of posts last year about how yield was being calculated on 80CCF tax saving debt instruments, and I see that there is a need to distinguish yield calculation on those type of instruments with the yields on instruments where interest itself is tax free like the PFC tax free bonds.

But first, we need to look at the nature of the tax benefits in the two instruments.

Tax benefit under the 80CCF bonds: What this does is reduce your taxable income by the amount of bonds you buy, and thereby reduce your tax liability.

So, if you have a taxable salary of Rs. 10.2 lakhs, and you buy Rs. 20,000 worth of these bonds then your new taxable salary will just be Rs. 10 lakhs and you won’t have to pay tax on the Rs. 20,000 that you invested in these instruments.

Since you are in the 30.9% tax bracket – you save  30.9% of Rs. 20,000 or Rs. 6,180 in tax.  Now, keep in mind that this is the only tax benefit you get and  you get this only once.

Once you start earning interest on 80CCF bonds – you are liable to pay tax on them like you are liable to pay tax on the interest you earn from a fixed deposit.

Due to this reason – people felt it was a bit misleading for bond issuers to show what the effective yield was for these bonds by taking the tax benefit into account, but ignoring the tax that you would have had to pay on interest income.

I wrote about this in the limitations on the way yields are calculated for tax saving bonds, and together with the other two posts on calculation of yields on tax saving bonds, and the L&T Finance yield example – these three posts cover all important aspects on the mechanics of yield calculation on such instruments.

Tax benefit under the tax free bonds: The other type of bonds are the tax free bonds whose interest is not taxable. These are like the RBI relief bonds that were issued a few years ago or the PFC bonds that are open for subscription now.

In these type of bonds – you don’t get any tax benefit by way of reduction of your taxable salary, but since the interest itself is tax free – that improves the effective yield, and the higher the bracket you are in – the better it is.

The way to calculate the effective yield on these type of instruments is to use the following formula.

Effective Yield  = {Interest Rate / (1 – Tax Rate)}

Now that you know how both the yields are calculated – it is fairly simple to compare the two. Just take the after tax yields of both the instruments and see which one is higher.

I will have a future post with a Google Spreadsheet to go along with it that shows some live examples, and that should make this mechanism even easier to understand.

The Sensex is one of the most widely followed index in India, and in this post we are going to look at how the Sensex is calculated.

The Sensex is constructed using the free float methodology, which simply refers to a company’s share capital that is freely available for trading.

You know that market capitalization is the number of shares that a company has multiplied by the price per share, so when they say that Coal India has become the most valuable company in the country – this is what they refer to.

Free float is that part of the company’s capital that’s not held by promoters, governments or other strategic investors and is available to trade on the stock exchange freely.

Now, the free float market capitalization method simply means that the company with a higher free float will have a higher weight in the index, and a great way to understand is to just take a look at the Sensex constituents for a particular date.

In this table I’ve taken the data as it stands on November 4th 2011.

Scrip Code	Company	Close Price	No.of Shares (normal)	Full Mkt. Cap. (Rs. crore)	Free-Float Adj. Factor	Free-Float Mkt. Cap (Rs. crore)	*Weight in Index (%)*
500325	RELIANCE	879.6	3274230107	288001.28	0.55	158400.7	10.97
500209	INFOSYS LTD	2829.1	574203082	162447.79	0.85	138080.62	9.56
500875	I T C LTD	210.35	7773036720	163505.83	0.7	114454.08	7.93
532174	ICICI BANK L	885.2	1152447612	102014.66	1	102014.66	7.06
500010	HOUSING DEVE	682.9	1469093501	100324.4	0.95	95308.18	6.6
500180	HDFC BANK LT	482.1	2335493765	112594.15	0.8	90075.32	6.24
500510	LARSEN & TOU	1392.85	611161097	85125.57	0.9	76613.02	5.31
532540	TCS LTD.	1099.1	1957220996	215118.16	0.3	64535.45	4.47
500112	STATE BANK O	1964.25	634998991	124729.68	0.45	56128.35	3.89
532454	BHARTI ARTL	397.95	3797530096	151122.71	0.35	52892.95	3.66
500312	ONG CORP LTD	277.65	8555490120	237543.18	0.2	47508.64	3.29
500520	MAHINDRA & M	835.05	613974839	51269.97	0.8	41015.98	2.84
500696	HIND UNI LT	378.85	2160326258	81843.96	0.5	40921.98	2.83
500570	TATA MOTORS	188	2691485485	50599.93	0.7	35419.95	2.45
500470	TATA STL	467.9	959214779	44881.66	0.7	31417.16	2.18
532555	NTPC LTD	179.55	8245464400	148047.31	0.2	29609.46	2.05
500103	BHEL	333.65	2447600000	81664.17	0.35	28582.46	1.98
532977	BAJAJ AUTO	1743.1	289367020	50439.57	0.5	25219.78	1.75
532286	JINDAL STEEL	577.3	934509595	53949.24	0.45	24277.16	1.68
507685	WIPRO LTD.	371.55	2457457840	91306.85	0.25	22826.71	1.58
524715	SUN PHARMACE	511.55	1035550385	52973.58	0.4	21189.43	1.47
500182	HEROMOTOCO	2116.2	199687500	42257.87	0.5	21128.93	1.46
533278	COAL INDIA	326.35	6316364400	206134.55	0.1	20613.46	1.43
500440	HINDALCO IN	139	1918551613	26667.87	0.7	18667.51	1.29
500900	STERLITE IN	123.15	3360700478	41387.03	0.45	18624.16	1.29
500400	TATA POWER	103.3	2373072360	24513.84	0.7	17159.69	1.19
532500	MARUTISUZUK	1123.35	288910060	32454.71	0.5	16227.36	1.12
500087	CIPLA LTD.	293.7	802921357	23581.8	0.65	15328.17	1.06
532868	DLF LIMITED	246.8	1698001797	41906.68	0.25	10476.67	0.73
532532	JAIPRAK ASSO	79.25	2126433182	16851.98	0.55	9268.59	0.64

Notice how there is not much difference between the market capitalization of  Reliance and Coal India relative to their weight in the Sensex. One has a weight of almost 12% while the other has a weight of just 1.43%.

The difference is due to the fact that while most of Coal India is owned by the government, most of Reliance is owned by the general public and has a much higher free float as a result.

You will also see that there is a column called Free Float Adj Factor there which indicates what fraction should the total market capitalization be multiplied with to come up with the free float market capital to be considered in the Sensex calculation.

So, they just don’t say this company has a free float of 42.5% so let me multiply its market cap with .425 but rather they have slabs and decide how much to multiply the total market capitalization based on which slab it falls under.

Here is the table that shows the slab:

% Free-Float	Free-Float Factor	% Free-Float	Free-Float Factor
>0 – 5%	0.05	>50 – 55%	0.55
>5 – 10%	0.1	>55 – 60%	0.6
>10 – 15%	0.15	>60 – 65%	0.65
>15 – 20%	0.2	>65 – 70%	0.7
>20 – 25%	0.25	>70 – 75%	0.75
>25 – 30%	0.3	>75 – 80%	0.8
>30 – 35%	0.35	>80 – 85%	0.85
>35 – 40%	0.4	>85 – 90%	0.9
>40 – 45%	0.45	>90 – 95%	0.95
>45 – 50%	0.5	>95 – 100%	1

The next thing to look at are the weights, and it’s obvious that the way the index has been constructed – the weights change every second because price is an input for how much a stock will influence the Sensex, and that changes every second.

I have been recording the percentages for a few days to write this post, and here is a result from the past few days.

Nov 1 2011		 Nov 2 2011		 Nov 4 2011
 Company	Weight	 Company	 Weight	 Company	 Weight
RELIANCE	10.78	RELIANCE	10.93	RELIANCE	10.97
INFOSYS LTD	9.63	INFOSYS LTD	9.61	INFOSYS LTD	9.56
I T C LTD	7.88	I T C LTD	7.93	I T C LTD	7.93
ICICI BANK L	7.18	ICICI BANK L	7.12	ICICI BANK L	7.06
HOUSING DEVE	6.64	HOUSING DEVE	6.62	HOUSING DEVE	6.6
HDFC BANK LT	6.27	HDFC BANK LT	6.29	HDFC BANK LT	6.24
LARSEN & TOU	5.32	LARSEN & TOU	5.31	LARSEN & TOU	5.31
TCS LTD.	4.52	TCS LTD.	4.52	TCS LTD.	4.47
STATE BANK O	3.78	STATE BANK O	3.8	STATE BANK O	3.89
BHARTI ARTL	3.65	BHARTI ARTL	3.56	BHARTI ARTL	3.66
ONG CORP LTD	3.31	ONG CORP LTD	3.32	ONG CORP LTD	3.29
HIND UNI LT	2.92	HIND UNI LT	2.94	MAHINDRA & M	2.84
MAHINDRA & M	2.85	MAHINDRA & M	2.87	HIND UNI LT	2.83
TATA MOTORS	2.54	TATA MOTORS	2.52	TATA MOTORS	2.45
TATA STL	2.2	TATA STL	2.19	TATA STL	2.18
NTPC LTD	2.04	NTPC LTD	2.02	NTPC LTD	2.05
BHEL	1.9	BHEL	1.89	BHEL	1.98
BAJAJ AUTO	1.73	BAJAJ AUTO	1.73	BAJAJ AUTO	1.75
JINDAL STEEL	1.63	JINDAL STEEL	1.64	JINDAL STEEL	1.68
WIPRO LTD.	1.6	WIPRO LTD.	1.6	WIPRO LTD.	1.58
HEROMOTOCO	1.49	SUN PHARMACE	1.46	SUN PHARMACE	1.47
SUN PHARMACE	1.46	HEROMOTOCO	1.45	HEROMOTOCO	1.46
COAL INDIA	1.45	COAL INDIA	1.44	COAL INDIA	1.43
STERLITE IN	1.3	STERLITE IN	1.3	HINDALCO IN	1.29
HINDALCO IN	1.27	HINDALCO IN	1.27	STERLITE IN	1.29
TATA POWER	1.17	TATA POWER	1.18	TATA POWER	1.19
MARUTISUZUK	1.14	MARUTISUZUK	1.13	MARUTISUZUK	1.12
CIPLA LTD.	1.05	CIPLA LTD.	1.05	CIPLA LTD.	1.06
DLF LIMITED	0.7	DLF LIMITED	0.7	DLF LIMITED	0.73
JAIPRAK ASSO	0.62	JAIPRAK ASSO	0.62	JAIPRAK ASSO	0.64

This is an important point, and is something that most people aren’t able to wrap their heads around in the first time. When you think about weight of a stock in the Sensex you think of it as a static value like Reliance has 12%, ICICI Bank has 7% and so on, but that is not true because the weight changes every second as the price changes. In this table I have highlighted two companies whose relative importance changed from one day to another in the Sensex.

So, the weight shows you much the stock is currently worth to the Sensex but that is not a static value, and will change every second.

With those things out of the way – now think of the utility of the Sensex – why do you need the Sensex at all?

Like any other index – it tells you how the stock market is performing at any given time – a higher Sensex means share prices are higher, and a lower Sensex means share prices are lower and that share price movement is captured in the form of free float market capital in the Sensex.

To maintain continuity and make the number comparable across time – the Sensex had to have a base – and that base was the market capital of the stock market in 1978 – 79 and the base index value of the Sensex was 100. The value that you see today is the sum of the free float market capital of the thirty companies relative to the base market capital.

The base is not a static value but keeps changing because they need to account for special events like rights issue, bonus issues, change of companies in the index so that these special events don’t affect the continuity of the index.

Based on the market data that I have seen for the past few days I have calculated the current base market capitalization as Rs. 8,221.94 crores.

Formula to calculate the Sensex

The formula to calculate the Sensex is as follows:

(Sum of Free Float Market Capital / Base Market Capital ) x 100

You can get the sum of free float market capital very easily from this page, however this changes every day so you need to save it with you if you need to refer to it later.

For this post – I have saved the data in my spreadsheet.

Let’s look at some of the past data:

Nov 1 2011 (1,437,262.79 / 8221.94) x 100 = 17,480.83

Nov 2 2011 (1,435,949.06 / 8221.94) x 100 = 17,464.84

Nov 7 2011 (1,443,986.58 / 8221.94) x 100 = 17,562.60

Nov 8 2011 ( 1,444,556/ 8221.94) x 100 = 17,569.53

Nov 9 2011 (1,427,501.45 / 8221.94) x 100 = 17,362.10

You can quite easily calculate the Sensex any day by just going to the BSE Website, and getting the total market free float and putting it in this simple formula. If it doesn’t come up correct, then that means the base market capital has been changed and you need to back calculate that and test it out on a few days to make sure that you have the right base market capital and then use it to calculate the Sensex in the ensuing days.

Once you understand all the inputs that go into the calculation it becomes fairly simple to calculate the final Sensex value, but probably more important than calculating the value is to understand the mechanics behind it and what it’s trying to show to you.

As always, questions and comments welcome – especially if there were some parts that you thought were not clear enough and need more explaining.

This post is from the Suggest a Topic page.