Understanding SENSEX and how to invest in it?

invest in sensex

The stock market has become the new playground of wealth in India with new investors popping up daily. With the coming of new investors, common terms such as mutual fund, profits, shorting, are becoming more prominent to people. 

One of these new terms is the word SENSEX. It describes an investment that is very popular in the market and creates a sense of safety in the mind of the listener. Let us see what it is and what it has to offer.

What is SENSEX?

SENSEX is a compound word made up of two common everyday terms – Sensitive and Index. These words do a fair job of describing what SENSEX essentially consists of. 

It comprises 30 carefully selected companies that are the top performers in the market along with being financially stable and sound. 

What stocks are included in the SENSEX?

Since the companies that come under SENSEX need to be established in all sorts, there are various parameters that have been imposed so as to select them. These parameters do the job of weeding out the companies that have problems that could affect their financial standing in the future. Let us have a look at them.

Company size

The company size plays a major role in determining the eligibility of a company be listed in SENSEX. The parameter specifies that only large or mid-sized companies are to be considered to be listed in SENSEX. 

The reason why this criterion is so important is that it ensures that only the best and biggest companies make their way into the index. The larger the company, the more stability is expected from its future.

The reverse is also true. The more stable a company, the bigger it will grow. Hence, company size is a good factor to use when scouting companies to enlist into the index.

Listed on Bombay Stock Exchange (BSE)

The Bombay Stock Exchange, or BSE for short, is one of the biggest stock exchanges in India. It is an enormous marketplace for stocks to be traded continuously at breakneck speeds. 

It’s a no-brainer that one of the criteria for being selected for SENSEX is that the company should be listed on the Bombay Stock Exchange.

Being listed also provides an easy pathway for the buying and selling of individual stocks.

Sector Weight of the company

Sector weight is a way of representing the entire economy in the index with the help of the companies that have been listed. Every company belongs to a certain sector. And every sector has its contribution to the economy. 

The aim of the index is to closely mimic the economy to increase stability. A growing economy is a good base to create the index about. Hence, the companies listed in the index should be selected in such a way that their representation is close to the representation of the industry in the economy. 

Therefore, sector weight is essential to maintain the integrity and the purpose of the index.

High liquidity of shares

It is very important for a stock to have high liquidity. Liquidity is a feature that tells us how easy it is to buy or sell a stock. A stock with low liquidity signifies improper functioning of the company.

It is no surprise that to be listed in SENSEX, a stock needs to have high liquidity. Liquidity is a functional quality of the business in question. Thus, it is also a measure of how well it works, acting as a filter for the listing of SENSEX.

Revenue from core activities

A business can have multiple activities under its wing. It is very common nowadays to see businesses diversifying their operations by dabbling with other activities. 

To be listed in SENSEX, a company should have a substantial amount of revenue from its core activities. Core activities here refer to the primary service that the company offers and is built around. For example, Ralph Lauren is a clothing brand and Nestle is a food company.

Weightage of companies

There are a total of 30 companies that comprise SENSEX at any given point in time. The companies may change after every few intervals but their total number remains more or less the same.

Something worth noting is the fact that all companies do not have an equal weightage in the fund. The weightage of every company is determined with the help of statistics describing the economy. For example, if there is a boom in the textile industry currently, then the current SENSEX will be adjusted in the same terms giving more weightage to any company that deals with textiles. 

This adjustment is very crucial because the index is supposed to be a representation of the current state of the economy. Timely adjustments will ensure that money is invested in the proper places along with the constant changes in the economy. Hence, the weightage of the fund is a very important feature to know and consider.

Investing in SENSEX

Now that we know the details, let us see how to invest in the SENSEX index fund. There are two methods with which you can invest in SENSEX. On your own, and through a mutual fund.

Buy stocks on your own

SENSEX is common knowledge and can be searched and understood by anyone. The weightage of every company is indicated separately and all changes are updated in the shortest time possible. 

You can use this information and invest the required amount independently by searching how to invest in BSE SENSEX. This gives you the freedom to incorporate changes according to your wishes and always know where your money is. 

There is only one disadvantage to this method which is small amounts may not be able to buy stocks in the required amounts. What this means is that stocks cannot be bought partially. You cannot buy half of a stock or 20% of a stock. 

Let us say that you need to invest 1000 Rs and the current SENSEX weightage holds TATA at 10%. This would mean that you should invest 100 Rs in TATA. But since the stock price of TATA is upwards of 400 Rs, you hit a wall. This is where the second method comes in.

Invest in Index Mutual Funds

The other method of investing in SENSEX is through mutual funds. Mutual funds collect money from customers and invest the entire collected amount in various stocks according to a predetermined portfolio.

SENSEX related mutual funds start from amounts as low as 500 Rs and invest it according to the SENSEX portfolios. They are managed by experts who constantly monitor updates to the weightage of companies and change investments accordingly. They remove the need for every investor to spend a large amount of time in the research and monitoring of the index.

Conclusion

SENSEX is a tool that is being used by investors to create a stable source of income for a long time now. The results of the past are enough to prove that investing in this index is a prudent choice for anyone who wishes to see their money grow.

It is now up to you to use this tool yourself and reap the fruits that the stock market has to offer.

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