When people talk about the movement of the Indian stock market, the Sensex is one of the indices you will frequently hear about. But instead of purchasing the stocks in the index individually, investors can access the same basket through Sensex funds.

Sensex funds are passive mutual fund schemes that aim to replicate the performance of the BSE index. The index consists of 30 large and liquid companies drawn from major industries of the Indian economy. It is also India’s oldest stock market index.

The BSE Sensex follows a free float market capitalisation methodology. This means that the 30 companies do not receive identical weights. The weighting considers the market value of shares that are already available for trading, rather than simply dividing the index equally among all its constituents.

A Sensex fund attempts to maintain a portfolio aligned with the index. Consequently, its objective is not to identify stocks that may outperform the market, but to stay close to the performance of its benchmark.

You can consider investing in Sensex funds if you are:

• Looking for a compact large company portfolio: The BSE Sensex contains 30 companies rather than hundreds of stocks. This gives you exposure to a select group of established companies through a single fund.
• Prepared for equity market movements: Investing in well-established companies does not make an investment immune to market declines. Consider whether your financial goal gives you enough time to deal with periods when the value of your investment falls.
• Looking for exposure across different industries: Although the index contains only 30 stocks, it is not restricted to one sector. Its constituents are drawn from major industries represented in the Indian economy.
• Comfortable letting an index determine the portfolio: There is no need to rely on a fund manager to continuously choose which companies should be bought or sold. The fund follows changes made to the underlying BSE Sensex.

Consider what happens when you put Rs. 80,000 in a Sensex fund.

The fund does not simply divide Rs. 80,000 into 30 equal portions. Instead, the scheme maintains its overall portfolio in line with the composition of the BSE Sensex. Since the index is weighted by float-adjusted market capitalisation, large index constituents receive a correspondingly larger representation.

If the value of your investment increases by 6%:

Rs. 80,000 + (Rs. 80,000 x 6%) = Rs. 84,800

Consequently, if the value of your investment falls by 6%:

Rs. 80,000 - (Rs. 80,000 x 6%) = Rs. 75,200

This 6% movement is purely illustrative. It is not a projection of what Sensex funds may earn or lose. Additionally, even though the fund is trying to replicate the Sensex, the returns may not be identical. Expenses, cash balances, corporate actions and changes to the underlying index can create differences between a mutual fund and its benchmark.

A Sensex fund turns a well-known market benchmark into an investable portfolio. There are several practical advantages to this approach:

• Thirty stocks without thirty separate transactions: Recreating the Sensex yourself would mean purchasing its constituents in the required proportions and adjusting the portfolio when the index changes. A fund handles this at the scheme level.
• One company does not determine the entire outcome: Your investment is distributed across multiple Sensex constituents. A problem affecting one business therefore does not mean your entire investment is tied to that single company, although larger constituents can still have greater influence.
• The portfolio has a visible framework: You can see which benchmark the scheme follows and understand the rules behind its construction. This makes the source of the fund’s underlying exposure easier to understand.
• Exposure extends across different sectors of the economy: The Sensex is not built around one particular industry. Its construction seeks representation across major economic segments, giving the portfolio a broader base than a single sector strategy.

Here are the risks associated with investing in Sensex funds:

• Thirty companies leave much of the market outside the portfolio: A Sensex fund does not give you direct exposure to hundreds of other listed companies. Much of the mid cap and small cap universe, for instance, falls outside this 30-company benchmark.
• Established companies can still lose market value: Being selected for the Sensex does not protect a company from weaker earnings, economic shifts or changes in investor sentiment. When constituent prices decline, a passive fund follows those movements rather than avoiding them.
• The fund may not mirror the index perfectly: Tracking differences can arise because of expenses, cash holdings, corporate actions and portfolio adjustments.
• The biggest weights can shape the outcome: Because constituents do not receive equal weights, movements in heavily weighted stocks can have a noticeably larger effect on the index.
• There is no defensive stock picking: An active fund manager may make investment decisions based on their assessment of individual businesses. A passive Sensex fund instead invests according to its benchmark and is not designed to take defensive positions simply because markets are falling. SEBI scheme disclosures explicitly recognise this feature of index investing.

Rather than trying to predict the Sensex movement, consider four questions that are within your control:

• When will you need this money: If a financial goal is approaching soon, you may have less room to wait through an equity market decline. Your investment timeline therefore matters alongside the fund you select.
• What do you already own: If several of your existing investments already hold many Sensex companies, another Sensex fund may increase portfolio overlap. Multi Cap Funds, for example, follow a different mandate by investing across large cap, mid cap and small cap companies.
• What does the scheme say about risk: Check the Riskometer before investing rather than relying on the reputation of the Sensex itself. SEBI requires mutual fund schemes to display the Riskometer so investors can assess the indicated level of risk.
• Would investing gradually suit your plan: A SIP allows you to invest across different dates and market levels instead of committing the entire amount at once. It does not guarantee better returns or remove the possibility of losses.

The Sensex and Nifty 50 appear together in market reports, which can make them seem interchangeable, which they are not:

Nifty 50 funds follow a different benchmark with its own constituent selection methodology. What matters to an investor is the exposure created by each index and how that fits with the rest of the portfolio - not merely which index has the larger number of stocks.

Here is how you can select the best Sensex funds to invest in:

• Check how closely they have followed the benchmark: Tracking difference compares the return of the fund with that of its benchmark. Tracking error, meanwhile, measures the variability of the difference between the returns of the portfolio and the benchmark.
• Understand the product structure: Sensex exposure may be available through mutual fund and ETF routes. If you are considering investing in index funds, understand how the particular product is bought, held and redeemed.
• Look at the costs: Compare the expense ratio of schemes following the same index. Since these expenses are borne at the scheme level, they are relevant when evaluating otherwise similar passive funds.

Once you have understood the benchmark and compared the Sensex funds to invest in, you can proceed to invest through Millions:

• Download the Millions app from the Google Play Store or the iOS App Store.
• Enter a few details and complete your KYC.
• Search for Sensex funds available on the platform.
• Open the scheme details and review its benchmark, tracking information, expense ratio and Riskometer.
• Compare the available options based on what you need from the investment.
• Enter the investment amount and choose the available SIP or lumpsum route.
• Check the transaction details before completing the investment.