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There is significant difference in returns between the indices tracking the midcap segment on two of India"s largest stock exchanges.
In the recent two month rally which has taken stock market indices to all-time highs, the National Stock Exchange's CNX Midcap has given over 12.09% returns while the BSE's S&P BSE Midcap has gained by 10.4% returns- a difference of 166 basis points.
Even while the two indices are representatives of the same segment of midcap stocks, each index varies in terms of the number of stocks included in them as well as the definition of midcap segment.
As per the NSE definition, the total number of stocks in the midcap index does not at any point cross 100. On the other hand, the BSE midcap index states that the number of stocks in the index would remain "variable". At present, the BSE midcap index has 229 stocks, double the number of stocks included in the CNX midcap.
Analysts said that this does lend significant volatility to one index over the other.
"The larger the number of stocks included in an index, the higher will be the liquidity issues. This is because the index could then include stocks which are not very liquid or which have become illiquid over a period of time," said the head of an Indian brokerage house.
Similarly, on the NSE stocks are required to have a trading frequency of at least 90% over the last six month period. While on the BSE, stocks have to be traded for at least 60% of time in the last three months.
The indices also serve as benchmarks for close to 70 mutual fund schemes focussed on the midcap space. About one-third of all the midcap schemes are benchmarked to the CNX midcap index. Those indexed to the BSE midcap space make up about one-fifth of the total midcap fund universe.
"Investors"need to see which of the indices have been able to sustain returns every year and the average CAGR (compounded annual general returns)," said S Krishan Kumar, head of equity of Sundaram Mutual which has one midcap fund benchmarked to the BSE midcap index.
On Friday, the BSE midcap index rose by 1.5% while the NSE midcap index was up 1.9%.
