What Are Nifty and Sensex?

An index is a way of measuring a group of shares with a single number. Instead of tracking hundreds of share prices one by one, you watch one figure that rises when most of those companies rise and falls when most of them fall.

Think of it like a class average in school. One student may do badly and another very well, but the average tells you how the class did overall.

An index works the same way. On a given day, some companies in it rise and some fall, and the index tells you which way the group moved on balance.

The Sensex, short for Sensitive Index, tracks thirty large, well-established companies listed on the BSE, the Bombay Stock Exchange. It is one of the oldest market indices in India.

The companies come from different sectors such as banking, IT, energy and consumer goods. The list is reviewed from time to time, so companies can be added or removed.

The Nifty 50 tracks fifty large companies listed on the NSE, the National Stock Exchange. Because it has more companies, it covers a slightly wider slice of the market.

It is the index most index funds in India follow. Our page on Nifty 50 versus Nifty Next 50 explains the next group of companies as well.

• Exchange: Sensex is BSE. Nifty is NSE.
• Number of companies: Sensex has 30. Nifty has 50.
• Overlap: most Sensex companies are also in the Nifty, so the two usually move in the same direction on the same day.

For an ordinary investor, the difference rarely matters. Both give you a quick sense of how large Indian companies are doing.

Each company counts according to its size in the market, but only the shares that are freely available for trading are included. Bigger companies move the index more than smaller ones.

That is why a big move in a few very large companies can pull the whole index up or down, even if many other companies moved the other way.

Share prices move with company profits, interest rates, the economy, government decisions, global events and the mood of buyers and sellers.

On any single day, the moves can look random. Over many years, the index has tended to reflect how the underlying businesses grew, with plenty of falls along the way. Our page on risk and volatility explains why short-term moves tell you little.

Nifty and Sensex are the famous ones, but there are many others.

Nifty Next 50 tracks the fifty companies after the top fifty. Midcap and smallcap indices track smaller companies. Sector indices track one industry, such as banking or IT. Broad indices like the Nifty 500 cover a much bigger slice of the market.

Each mutual fund picks the index that best matches what it invests in, which becomes its benchmark. Our page on large, mid and small cap funds explains the size groups.

The actual number, whatever it is on a given day, has no meaning on its own. What matters is the change: how much it moved today, this year, or over ten years.

A "record high" in the news simply means the index is above every earlier level. It does not tell you whether the market is expensive or cheap, or what will happen next.

If you hold a Nifty 50 index fund, its value moves closely with the Nifty. Our page on index funds explains how they work.

If you hold an active equity fund, it may move differently, because the fund manager picks different companies. Your fund is judged against its own benchmark, which may be a wider index, as our page on the benchmark explains.

If you hold a debt fund, the Sensex and Nifty barely matter to it at all.

Over many decades, both indices have risen a great deal, but not in a straight line. There have been years of sharp falls, long flat stretches, and strong recoveries.

We do not make predictions. If you want to see how the Nifty has behaved year by year, our Nifty calendar year returns page shows the history, including the bad years. Looking at it is a good reminder that falls are normal.

No. A big fall in the Sensex makes headlines, but for a long-term SIP it simply means your next instalments buy more units at lower prices.

Our page on your SIP when the market falls explains why reacting to headlines usually costs money. Let the index be something you understand, not something you react to.

Not directly, because an index is only a number. But you can invest in a fund that copies it.

An index fund or an ETF buys the same companies in the same proportion as the index, at low cost. Our pages on ETF versus index fund and index fund versus flexi cap fund help you compare the options. We are distributors rather than investment advisers and we recommend no schemes. If you want help understanding what you hold, get in touch.