Alternative stock market indexes

I
saw this
interesting article about the mind-share of Nifty as opposed to
the BSE Sensex. It is by Samie Modak and Muthukumar K. in
the Financial Express.

The NSE
data for June 2010 shows that Nifty futures have peaked at
Rs.0.36 trillion of notional turnover in a day (27 Jan 2010) and
Nifty options have peaked at Rs.0.89 trillion of notional turnover
in a day (24 June 2010). Nifty has shaped up as one of the big
contracts by world standards. It is interesting to go back and
read the
original paper. Those were interesting times. Looking back, it
seems obvious that Nifty would dominate the derivatives market,
but at the time, the outcome was far from clear.

This made me look at data on risk and reward of the alternative
indexes. I start from the first data for Nifty Junior, which takes
me back to 21 February 1997, thus giving data for 13.7 years.

	Mean	Volatility	Ratio
Nifty	12.99	26.37	0.4926
BSE Sensex	12.68	26.92	0.4711
Nifty Jr.	18.16	32.38	0.5608
CMIE Cospi	17.40	27.23	0.6391

Nifty and the BSE Sensex are a lot like each other.

The real surprise is Nifty Junior: Merely moving down from rank
1-50 to ranks 51-100 has given an enormous juice in the return and in
the reward-to-risk ratio. But the volatility of Nifty Junior is also
higher.

The CMIE Cospi index has roughly 2800 stocks today, and represents
the broad market. It includes the Nifty Junior stocks and a host of
other smaller stocks. But unfortunately, these numbers are not
comprabale with the other three in that it includes dividends while
the other three do not. With this combination of high diversification
(giving a low volatility), small-cap stocks (which helps returns) and
inclusion of dividends (which helps returns), it is not surprising
that it scores the best reward-to-risk ratio.

In my mind, most of the claims of out-performance by active
managers in India are purely about being invested in the non-Nifty
space. Nifty Junior ETFs are easily accessible and I get surprised
that more people aren't putting this into their investment
strategy.