The Ever-Changing Face of Our Indices

Markets had their third consecutive green day with one gap-up session followed by two strong sessions. The ongoing tug-of-war between nations continues to create uncertainty. While no breakthrough has been achieved yet, the progress in peace talks has brought relief across the world.

On the domestic front, the GST reforms continue to remain in focus. Foreign institutional investors had shown buying interest in the last session, and today’s numbers are awaited.

• Still, Indian markets brushed it off for the day, with Nifty ending 0.28% higher, slightly above 25,000.

• Nifty Junior rose 0.38%, midcaps gained nearly 0.5%, and small caps moved up 0.34%.

• Banks, however, stayed weak, closing down 0.3%.

• Gold remained flat at ₹9,857 per gram, up just 0.33%.

Other Market Triggers

• IT stocks stood out in green, with TCS making news through a European tie-up on AI tools. This created optimism around Indian IT’s ability to grow through global partnerships.

• FMCG stocks also performed well, led by Hindustan Unilever, Nestle, and Tata Consumers, though ITC lagged. NTPC and Tata Steel saw good gains, while Tata Motors slipped 1.5%.

• Ola Electric saw heavy trading after its steep fall from ₹100 to ₹40, bouncing back to ₹50. Whether this is a temporary recovery or something bigger will depend on whether the stock can sustain above ₹56.

What to watch next ?

• Despite no fresh news from overseas, the U.S. Secretary mentioned possible tariffs and even sanctions against India, while Russia announced a further 5% cut in crude oil supply.

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What To Read This Week ?

The Ever-Changing Face of Our Indices

We recently came across a thought-provoking observation from Devina Mehra, highlighting a crucial aspect of investing that is often overlooked: the impermanence of index constituents.

A look back at the original Sensex list from its inception reveals a lineup that is unrecognizable today. Companies like Asian Cables, Balarpur Industries, Hindustan Motors, and Zenith, which were once mainstays, have long since vanished from the index.

This trend is not limited to the past. More recently, names like Satyam Computers, Yes Bank, Idea, and Reliance Power were all once part of the prestigious Nifty50. Their removal underscores a fundamental truth about the stock market: stocks will come and stocks will go. A very small fraction of companies manages to not only remain on the index for decades but also continue to deliver strong performance.

How an Index Acts as a Momentum Strategy

This constant churn is, in fact, a feature, not a bug, of the index itself. An index is a dynamic, self-correcting mechanism. It systematically removes the weakest performers and introduces new, stronger companies. In a way, the index behaves like a perpetual momentum strategy, constantly bringing in fresh strength and shedding old weaknesses.

Imagine a conveyor belt: the best-performing companies are at the front, and as they slow down, they fall off the end, replaced by new, faster-moving companies from the back. This automated process ensures that the index as a whole remains a reflection of the current economic leaders, even if the individual components change.

The Problem with the "Buy and Forget" Model

This reality has significant implications for your long-term investment strategy. Relying on a small number of currently well-performing stocks for your long-term financial goals is a highly risky proposition. Disruption from technology, shifts in market share, and unforeseen challenges can cause even established companies to fall out of favor quickly. The old adage of "buy it, shut it, and forget it" simply does not work in today’s fast-paced world.

For the individual investor, this presents two clear choices:

• Option 1: Embrace the Index. If you find yourself struggling to consistently beat the market, perhaps it's time to consider index investing. By investing in an index fund or ETF, you automatically benefit from the index's built-in self-correction, capturing the performance of market leaders without the burden of constant stock picking.

• Option 2: Review Your Bets. If you are confident in your stock-picking abilities and hold a concentrated portfolio, it is essential that you regularly review your holdings. Monitor performance, reassess your investment thesis, and be prepared to make changes.