Speak of Investing in Indian Equities

When we speak of investing in Indian equities, do we exactly understand what we are doing? This assumes importance, as a sector-wise analysis of different parts of the cap curve points to major shifts over the past decade.

Investing in Indian equities is effectively investing in four different markets.The accompanying table highlights the sector profile of the NSE-listed stocks in four buckets as of December 2010.

The profile of the top 100 stocks by market cap (#1 - #100 NSE stocks sorted on the basis of market cap) gives you an idea of the large-cap category.This is familiar territory as it drives trends in S&P CNX Nifty and the BSE Sensitive Index.

In a healthy development, which also reflects the underlying robustness in the economy, six of 10 major sectors have a share that is double digits. This means a high degree of diversification and enhances the appeal of the large-cap space. This has not been the case always and is only a development of the past two years.

The group of second 100 (# 101 - # 200 by market cap) is vintage mid-cap terrain.There is higher degree of concentration, as financials have a prominent share. Industrials slip into the top 3 sectors while telecom becomes a marginal presence. This is also most aggressive of any of the buckets with financials, industrials and materials driving the trends.

The third group (# 201 - # 300 by market cap) is small-cap territory. In a sign of breadth of the financial sector, it stays as a major presence while materials take centre-stage. Energy becomes a marginal presence while the consumer basket become a more pronounced part.

The fourth group (stocks ranked beyond # 300 by market cap) is small- and micro-cap spaces and is inherently riskier.What adds to the risk is the concentrated nature of this category as the top three sectors account for almost two-thirds of the market cap; this is in contrast to a share of about 44% for the top three sectors in the large-cap and overall market.

The inherent divergences and the growing size of the mid- and small-caps mean the overall market profile presents us with a fifth dimension.The message for investment is to onsider these trends and what they mean for risk-return while allocating funds for different parts of the market.