Mutual Funds: How does the BSE 500 index offer exposure to a wide basket of stocks?

Whether an investor is just starting off or is seasoned, one constant challenge is deciding on where to invest. Specifically, there is always the difficult task of choosing a specific market capitalization segment to invest in.

The task becomes tougher when some parts of the market are rallying smartly, while others are still in a lukewarm mode. That is when investing across the market would work well and solve the puzzle of having to choose a specific segment. An investment in the S&P BSE 500 would be the ideal solution for taking exposure to a wide basket of stocks.

The S&P BSE 500 index has a healthy mix of large, mid and small-cap stocks, spread over an entire gamut of sectors. For an investor, the ETF or an index fund routes are available for taking exposure to the index. The index is rebalanced on a semi-annual basis. For an investor, the index serves as an ideal multicap passive fund and can be a key component in their portfolio.

Why invest in the Index?

Represents almost the complete market: As mentioned earlier, the market capitalization of all BSE-listed companies totals up to ₹393 trillion. The S&P BSE 500 index’s market capitalization alone comprises ₹351 trillion (as of April 19). Therefore, the index represents nearly 90 per cent of the overall market capitalization. As a benchmark, it helps investors by capturing a giant share of the overall market trend.

A multicap passive fund: The index provides access to as many as 100 large caps, 150 mid caps and 250 small caps in varying proportions. For investors, this gives a chance to gain from a multicap approach via the passive route, giving exposure to every market segment. Large companies have high margins, strong brands, steady cash flows and robust balance sheets. Mid and small caps usually have healthy growth prospects with respect to their sales and profits.

Excellent diversification: A 500-stock portfolio is a great diversifier in itself. As many as 22 different sectors get representation in the S&P BSE 500 index, thus providing considerable balance to the portfolio.

Cyclical, defensive, interest-rate sensitive and new-age companies would all figure in the index. So, when some sectors find the going tough, others would compensate by doing well. Also, many new age sectors, realty companies, capital goods and engineering companies and even small finance banks figure in the overall index.

Investing passively: Taking exposure to the S&P BSE 500 via the ETF or index route would provide a low-cost investment option for investors with no fund manager risk. Investing in the index with an investment horizon of at least 7-10 years can be rewarding for investors.

Robust performance record

Investments done in S&P BSE 500 TRI, have worked well across timeframes, by delivering healthy performances as can be gauged by point-to-point, SIP and rolling returns.

Taking the 5-year rolling returns (daily NAV) over the period April 2014-April 2024, the index has given a mean return of 12.6%. The median return is healthier at 13.2%. When 3-year rolling periods are considered for the same period mentioned earlier, a mean return of 13.5% and median return of 13.9% is seen.

Considering the point-to-point returns, the S&P BSE 500 TRI has managed to consistently deliver mid to late teen levels of compounded annual returns over a 3-10-year period.

For investors looking to take the systematic route to investing in the index, the performance record is encouraging. A 5-year monthly SIP in the index would have delivered an XIRR of 21.8%, while a 10-year SIP would have delivered returns to the tune of 16.7%.

Investors who favour the passive route to diversification outside their regular active mutual fund investments can consider buying units of S&P BSE 500 index ETF. Those without a demat can opt for the index fund route for taking exposure. While doing so, please be mindful that investments made here must align with one’s overall asset allocation pattern. In case if one is unsure, do consult a financial advisor.

Chintan Haria, Principal – Investment Strategy, ICICI Prudential AMC