11 hours ago
30 Stocks vs 50: Does Size Matter in Index Investing?
Everyone says 'diversify', but your index might not actually be that well-diversified!
When you invest in an index fund, the first two names that come to mind are Sensex and Nifty. Sensex, India's oldest stock market index, represents only the leading 30 companies listed on the Bombay Stock Exchange (BSE). In contrast, the Nifty 50 tracks the top-performing 50 companies traded on the National Stock Exchange (NSE).
One index holds 30 stocks, the other 50 but does that make Nifty truly more diversified? And does this diversity translate into better growth, stability or returns?
In this article, we will find out if the number of stocks really matters or it is just superficial information to lure investors. Evaluating Portfolio Diversity in Index-Based Investing
At first glance, investing in 50 companies might seem like a smarter way to spread out your risk. But the difference isn't as significant as it appears.
That's because Sensex and Nifty 50 have a lot in common – nearly 85%¹ of the stocks in these indices overlap. The additional 20 stocks in Nifty tend to be smaller in size and often don't move the needle much when it comes to overall index performance. So, even though Nifty includes more companies, the impact on your portfolio may not be drastically different.
So, does a higher number of companies in an index guarantee better returns?
Not necessarily. The data below should help clear up some of the confusion and offer better insight into how both indices have actually performed over time. An yearly analysis on the Nifty and Sunsex Returns
As you'll notice, both indices have delivered nearly identical returns over time.
There are periods when Nifty edges ahead, and others when Sensex takes the lead. But over the last five years, the difference in median returns between them is just 0.12%². Simply put, having more stocks in an index doesn't automatically translate to higher returns for your investments.
Liquidity plays a key role for investors, especially when it comes to index funds or ETFs.
It affects how easily a security can be bought or sold in the market. So, does Nifty 50 (with its 50 stocks) offer better liquidity than the 30-stock Sensex?
Sensex is often seen as a blue-chip index because it includes some of India's most stable and well-established companies. But that also means the index is more concentrated, meaning just a few stocks can drive most of its movement, which can increase risk.
That said, managing a Sensex-based ETF is often simpler. With fewer stocks to track, fund managers can replicate the index more accurately, leading to lower slippage and minimal tracking error.
When comparing the Nifty 50 and Sensex on various parameters, several key differences emerge. The Nifty 50consists of 50 stocks and offers broader sectoral coverage, spanning 24 sectors. This wider base makes it a more diversified representation of the market. In contrast, Sensex comprises only 30 stocks and covers 13 sectors, offering a more concentrated exposure.
In terms of volume and liquidity, Nifty 50 tends to have the upper hand, with higher average trading volumes, making it more liquid than Sensex. However, fund management of a Sensex-based product is typically simpler and more stable due to the lower number of constituents. While Nifty-based funds provide more options, they can also introduce greater complexity in replication and tracking.⁹
With just 30 companies, the Sensex may not always offer complete sectoral coverage.
Sectors like FMCG or PSU banks, for instance, may be underrepresented. On the other hand, Nifty 50 includes a broader mix - it covers key sectors such as IT, banking, pharma, auto, telecom, and FMCG. This wider exposure can help cushion your portfolio if one sector underperforms, giving Nifty a slight edge over Sensex in terms of diversification.
Nifty 50 includes 20 more companies than the Sensex, which sounds like a win for diversification. But does this really boost returns - or risk over-diversifying?
While Nifty's broader base offers exposure across sectors and market caps, the smaller-weighted stocks in the index often have minimal impact on performance. For long-term investors seeking stable, steady growth, this depth is definitely a strength.
However, if you're chasing quicker gains, too much diversification can dilute your returns. That's the trade-off.
So before assuming 'more is better,' ask yourself: More of what? And does it align with your investment goals?
Investors today are looking beyond Nifty like Nifty 100, Nifty 200, Nifty Midcap 150, and Nifty Next 50 offer even broader exposure, taking diversification to the next level. Passive investing now stretches well beyond just 30 or 50 stocks.
But here's the real question: Instead of debating between Sensex (30) and Nifty (50), are you ready to explore indices with 100 or even 150 stocks? While this may seem like true diversification, there's a flip side too. When the broader market falls (economic crisis), these larger indices tend to fall harder too.
Here are three strong case studies that show how India's key indices, the Nifty and Sensex perform during volatile phases:
In March 2020, both Nifty and Sensex dropped by about 35%³ due to the pandemic.
But the fall didn't last long. By November 2020, Sensex had bounced back, rising nearly 58%⁴ from its March low.
This shows how even strong, blue-chip indices can be hit hard by global events. But it also highlights their ability to recover quickly when the market stabilises.
During every military tension in history (e.g. Indo-Pak war, joint operations etc.), the average market corrections shown by Nifty have been around 7%.
It has been reported⁵ that Nifty 50 typically reaches its lowest point within six days during a market crash but recovers in only about two days! In economic terms, such events are referred to as short-term corrections.
Nifty 50 may offer a bit more diversification than Sensex, but when it comes to performance, the difference is small. Sensex is easier to track and stays focused, while both indices include many of the same top companies that drive your returns.
So, instead of choosing between 30 or 50 stocks, focus on the fund itself, how well it tracks the index, what it costs, and how consistently it performs.
The next time you ask, '30 or 50?', also ask: Is my fund doing its job well? The number of stocks matters, but what you do with that number matters more.
