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It is difficult to keep track of all the market movements and changes when investing and trading in the stock market. This is why the indices came to the forefront to make tracking performance easier. An index is created by grouping the companies belonging to the same group, strategy, or market.
Two such indices by the National Stock Exchange (NSE) are sectoral and thematic. In this article, we will look at what are sectoral and NSE thematic indices and sectoral indices and the difference between sectoral vs thematic indices.
What is sectoral indices?
As the name suggests, sectoral indices are segregated based on the different sectors in the Indian stock market. These include banking, IT, media, financial services, telecommunications, etc.
These indices provide traders and investors summaries and comparative data of the whole sector and the companies that comprise it. Some common examples of sectoral indices are Nifty Auto, Nifty Bank, Nifty FMCG, Nifty IT, etc.
What is thematic indices?
The companies are listed under the thematic indices based on the specific investment themes they follow. These include themes such as economic, digital, social, etc.
Some common examples of the thematic indices are Nifty Consumption, Nifty Energy, Nifty India Digital, Nifty Housing, Nifty Commodities, etc.
Comparison between sectoral and thematic indices
With a basic understanding of the two types of indices, let us understand sectoral vs thematic indices. The following factors create a distinction between the two:
- Meaning
The sectoral indices track the performance of a particular sector such as IT, banking, auto, etc. For example, the Nifty Health index would cover all the companies that belong to the health sector listed publically on the NSE or BSE.
On the contrary, the thematic indices track the performance of companies belonging to a specific theme such as consumption, energy, housing, etc. They cover a broader range as they comprise companies in multiple sectors related to one common theme. For example, the NiftyIndia consumption index includes companies from healthcare, pharmaceuticals, media, auto, etc.
- Asset diversification
The sector indices offer limited opportunities for diversification as they only allow investors to invest in a particular sector at once. While the investment is made in different companies, they all still belong to the same sector. As a result, in case the sector does not perform well, there is a risk of negative impact at all times.
As against this, since the thematic indices are spread across different sectors based on a theme, they offer a better diversification opportunity. As a result, the risk of negative impact is comparatively less. Even if one actor within a theme does not perform well, the investors or traders can benefit from the performance of other sectors.
- Risk profile
The sector indices invest all the funds in a specific sector which adds to the risk but also introduces the possibility of better returns if the sector performs well. As a result, these funds are ideal for investors and traders who have a high risk tolerance.
On the contrary, the thematic indices provide a more diverse range of opportunities and minimise risk. They are comparatively less risky and better suited for people with low-risk appetites.
- Number of Constituents
The total number of constituents in sectoral indices usually ranges between 10-20 for all indices. As against this, the number of constituents varies based on the theme for thematic indices. To take an example, the number of constituents for Nifty Commodities is 30 while for Nifty Energy is 10.
Conclusion
Both sectoral and thematic indices are excellent investment opportunities for investors and traders looking to diversify their investment portfolios. However, it is recommended to thoroughly examine the risks, fluctuations and challenges of these indices before investing in them.
Both indices have their unique benefits and challenges. Consider your risk appetite and expected returns to opt for the best indice. To learn more, stay tuned to StockGro!
FAQs
The sectoral index comprises companies within the same sector such as Nifty Bank, Nifty IT, Nifty Auto, etc. They focus on different companies from one sector to chart the performance and trends within a sector.
The thematic indices comprise companies that operate based on one theme such as consumption. They comprise companies across sectors that deal with the same theme. As a result, their reach is greater than the sectoral indices.
The difference between sectoral and thematic indices is that the scope of thematic indices is greater than sectoral. Additionally, the risk involved is minimized in thematic indices because of the possibility of investing in companies from different sectors.
The thematic indices involve relatively less risk because they invest in companies across industry verticals. As a result, even if one sector does not perform well the other sectors still can.
It is recommended to invest in indices instead of individual company stocks because they are relatively easier to monitor, divide the risks and create a diversified portfolio for the investors and traders.
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