he Bombay Stock Exchange's index -- Sensex -- is about to welcome some new members.
Zee Telefilms and Hindustan Petroleum Corporation Ltd are being replaced by the stocks of National Thermal Power Corporation and Tata Consultancy Services on June 6.
The Sensex came out in 1986 and comprises only 30 stocks. The number does not change but the stocks get reshuffled now and then. The last reshuffle in stocks took place last year.
On May 19, 2004, Larsen & Toubro Ltd was taken out of the Sensex and replaced by Maruti Udyog Ltd.
Later in the year, on September 27, Larsen & Toubro Ltd made a comeback and replaced Mahanagar Telephone Nigam Ltd.
The criteria for selection in the Sensex depends on many factors. Some of them are:
i. Listing history
The company should have been listed on the BSE for at least six months for its stock to be available for trading.
ii. Trading frequency
The stock should have been traded on each and every day for the last six months.
iii. Market capitalisation of a particular level
This refers to the number of shares of the company multiplied by the current market price.
iv. Industry representation
Is the company a leader in its industry group?
These are just some of the factors considered and not a comprehensive list.
So what does this mean?
With the displacement of media major Zee Telefilms, the Sensex would be bereft of media representation.
As a result of this shuffle, technology stocks would see a greater representation with the entry of TCS and the already existing Infosys Technologies, Wipro and Satyam Computer Services.
Index funds will have to reshuffle their stocks, too.
These are mutual funds which only invest in the stocks of the index they are benchmarked against. So if they are benchmarked against the Sensex, they will only invest in the 30 stocks of the Sensex. If the stocks in the Sensex change, so will their portfolio (stocks they are investing in).
On March 31, index funds had Rs 63.43 crore (Rs 630 million) of Assets Under Management (the total amount of money being invested by them).
At present, there are 9 index funds which track the Sensex.
If you want to invest in stocks but want to take the bare minimum risk, an index fund could be an option worth considering.
