It’s Fund-amental
How does that affect the quality of the Sensex and Nifty and the debate about which one is better? “It’s all the same,” says Swati Kulkarni, who manages three index funds at UTI Mutual Fund. “The main issue for us is reducing the tracking error, which is dependent on the impact cost (the increase in price that would result from buying a large block of stock) we bear when we invest in index stocks; and here, we have no problem with our Sensex or Nifty index fund.”

Tracking errors are a measure of how closely an index fund’s portfolio tracks the index; an index fund manager would look to keep the tracking error to a minimum. An active fund manager, on the other hand, aims to achieve a higher return while keeping the transaction costs low.

For both practical purposes of an index (asset allocation and in performance measurement), certain qualities are required from the indices used. For example, a central assumption behind using an index as an investment choice is that the index is an efficient portfolio. In addition to its efficiency, the investor typically perceives the index to be a neutral choice of long-term risk factor exposure. In performance measurement, the index used is supposed to reflect fully and accurately the systematic risks to which the managed portfolio is exposed. The debate goes on about how the Sensex and the Nifty measure up against those parameters.