The index is not the market

Over dinner yesterday, an uncle of mine posed an interesting question: if the Sensex, which is an Indian index covering 30 stocks, when up from around 57k to 58k last year, why is it that most investment stock market related mechanisms/instruments, whether ETFs, Index funds, Portfolio Management Systems were down?

The index is not the market: a collection of 30 stocks, (or 50, if you take the NIFTY), can’t account for the price performance of the entire market. It remains representative of only the stocks in question. Apart from this, most investment instruments would have a mix of index and non-index stocks, they might also buy and sell stocks through the year (they don’t just sit and wait), and many will not have the same shares in the same proportion as their weightage in the index.

I was thinking that this statement, of the index not being the market, could apply to other areas as well: for example, the consumer price index or the wholesale price index are also not necessarily an accurate reflection of market prices of products. Naukri’s JobSpeak index is an indication of job posted on, and not the state of the job market in India. These are mere indicators: they’re useful, but they’re not the market.