If you’re an equity investor, then you know how important it is to keep a close eye on the performance of various sectors in India’s share market. By doing so, you can spot high-growth opportunities and capitalise on them. Want to learn more about how to track leading and lagging sectors?
Read on to understand the framework to measure the sector momentum and make informed allocation decisions.
What is Sector Performance, and Why Does it Matter?
The stock market is made up of various sectors and groups of stocks related by industry or products. For example, banking, IT, automobiles, pharmaceuticals etc. Sector performance refers to how different sectors are doing compared to each other and the overall market.
Tracking sector performance is important for investors to identify leading and lagging sectors. Money tends to flow from lagging sectors to leading sectors. Identifying rotation from one sector to another can provide lucrative trading opportunities. Additionally, analysing sectors allows investors to diversify properly and not overload on either winning or losing sectors.
Tracking Stock Market Sectors
There are two popular ways to track sector performance – using sector-based indices and category-based classification of stocks. In India, the NIFTY sectoral indices allow gauging the performance of sectors like banking, auto, metal, pharma, etc. Stocks listed on the NSE are also categorised into sector and sub-sector categories. Leading gainers and losers in each sector can be tracked.
Key Sectors to Monitor
There are 13 types of sectors in the stock market. Some of the major ones are:
- Banking – The banking as well as financial services sector is significant in India, which includes major banks and companies operating in this domain.
- IT – This sector encompasses major technology and software stocks which are critical to the economy of India.
- Automobiles – This covers stocks of major auto manufacturers and auto ancillaries. These stocks are known to be sensitive to economic cycles.
- Pharmaceuticals – The generic drug makers and major vaccine and medicine companies constitute a fast-growing industry globally.
- Energy – Oil and gas companies, as well as energy infrastructure players, are heavily influenced by fluctuations in global crude prices.
- Consumer Staples – Food and household goods are considered to be recession-proof defensive sectors.
Analysing Sector Performance
When analysing sector performance, pay attention to absolute returns as well as relative strength. The top-gaining sector may post great absolute returns but underperform the broader market.
A sector showing absolute returns, which may be appreciated more than market returns. Investors should spot sectors that post healthy absolute returns and demonstrate accelerating relative strength. Additionally, technical indicators like moving averages and momentum oscillators can signal when to buy or sell certain sectors.
What are Market Indices?
A market index represents a portfolio of stocks that reflects the performance of a specific market or market sector. For instance, the NIFTY 50 tracks the shares of 50 large Indian companies across sectors like IT, banking, infra, auto, etc. Leading indices like NIFTY and SENSEX are barometers of the country’s economic health.
Why do Market Indices Matter?
Market indices are barometers for measuring overall market sentiment and the direction of stocks. In India, the major indices to track are:
- Nifty 50 tracks the 50 largest and most liquid stocks in India, making it the broadest indicator of the market.
- The Sensex is an index consisting of 30 major large-cap stocks. It is the most popular index for the domestic market.
- The Nifty Bank consists of major bank stocks and is a significant indicator of the overall financial health of the banking industry.
- Nifty IT is a basket of major IT stocks that is useful for analysing the tech sector.
- Nifty Auto comprises major automobile companies that are highly sensitive to economic growth patterns.
Aside from these, there are indices for midcaps, smallcaps and other sectors too.
How Indices Help Investors?
Market indices act as broad benchmarks for investors in many ways:
- Determine the overall direction of the market – Whether it is bullish, bearish, volatile or calm
- Assess valuation levels – See whether the market is expensive or cheap compared to its history
- Invest in index-linked products – Index funds and ETFs are good options as they track the underlying indices
- Allocate your investments – Allocate your investments between large, mid, and small-cap funds
- Compare different sectors – Analyse which sectors are outperforming others, such as banking vs IT
- Understand your risk appetite – Higher indices indicate higher risk appetite
Types of Indices
In India, popular indices tracked by investors include:
1. Broad Market Indices:
NIFTY 50 and SENSEX reflect overall market trends via large-cap shares. The NIFTY NEXT 50 represents mid-sized companies.
2. Sectoral Indices:
Bank NIFTY tracks PSU and private banking stocks, while the NIFTY IT index monitors major IT companies.
3. Market-Cap Based:
The NIFTY Midcap 150 and NIFTY Smallcap 250 reflect mid and small-sized firms.
Factors Impacting Index Movements
Some common stimuli behind index fluctuations include:
- Quarterly company results in Recession or growth forecasts
- Regulatory changes impacting sectors
- Government policy announcements
- Global cues, including oil prices, forex movements
- The flow of foreign funds into India
- Inflation, interest rates and RBI signals
For instance, the Bank NIFTY may fall if RBI hikes rates or oil marketing firms drag the NIFTY lower when global crude prices rise.
By analysing movements in indices, investors get meaningful insights into market psychology and money flows. Hence, this allows them to time entries/exits better and position their portfolios appropriately. Though individual stock selection is important, tracking indices gives investors an overall feel of the market environment.
How to Invest in the Indian Share Market?
To invest in the Indian share market, you first need to open a Demat Account with a brokerage firm.
Demat accounts allow you to hold financial securities like stocks and bonds in electronic format. This eliminates the hassles involved with handling paper certificates.
When opening a demat account, you should shop around and compare charges across various brokerages. Factors like account opening fees, annual maintenance charges, and transaction fees can vary widely.
Newer online discount brokers often offer lower fees compared to traditional full-service firms. They also provide seamless online account opening and trading platforms.
Once the demat account is active, you can build an equity portfolio that aligns with your risk appetite and return expectations. Share market India offers exposure to fast-growing sectors such as IT, automobiles, pharmaceuticals, and financial services.
Equity investment requires a long-term perspective and the ability to tolerate volatility, but over time, stocks have outperformed other assets in inflation-adjusted returns.
Conclusion
It is important to understand how different industries are doing compared to each other and the overall market in order to make smart investments. Therefore, this helps you figure out which industries are growing quickly and which ones are struggling. By keeping an eye on trends and momentum, you can make better decisions about when to buy or sell stock in a particular industry.