In today’s Finshots, we unpack how the upcoming Sensex reshuffle could impact stocks, markets and your returns.

The Story

If the Indian cricket team is gearing up for a big tournament, selectors have a tough call to make. Veteran players have been solid for years but might be nearing the end of their prime. Meanwhile, there’s a rising star smashing sixes in every match. So, the big question is ― Do they stick with the tried and tested, or bring in fresh talent?

The same tough decisions play out in the stock market every six months. But instead of 11 cricketers, it’s India’s top companies under review. 30 for the Sensex and 50 for the Nifty. Think of these as the “teams” of India’s biggest companies. And just like selectors, the index managers reshuffle these companies to keep only the best on board.

And mind you, it’s not some random swapping of names. It’s serious business, with strict rules. First, the managers look at something called ‘free-float market capitalisation.’ Simply put, it’s how many shares of the company are available for regular people to buy apart from the owners. The more shares the public can trade, the better its chances of making it to the top.

Then, the second stat they care about is ‘liquidity’ – how easily these shares can be bought and sold without making prices swing wildly. If everyone’s trading the stock like crazy, that’s another tick in the box.

This reshuffling happens every six months. And even big names can get dropped. Wipro, for example, was replaced by Adani Ports in the recent Sensex reshuffle. And because of changes like this, today’s Sensex looks quite different from when it was first established in 1986. Here’s a look:

That brings us to two companies making headlines ahead of the December reshuffle — Trent and Bajaj Finserv.¹ Trent is expected to be added in the Sensex, while Bajaj Finserv might be removed. So why are they in the spotlight, and what could this mean for their stocks and market returns?

Let’s start with Trent, looking at the two criteria we just discussed. The company’s promoter ownership stands at 37%, which means that the public holds the remaining 63%, worth around ₹1.7 lakh crores. That’s a strong free float. Bajaj Finserv, on the other hand, has a higher promoter holding of over 60%, leaving a much smaller free float of 39%, valued at around ₹1 lakh crores.

Then there’s the liquidity criteria, which we measure by something called stock turnover. It simply shows how often a company’s shares are bought and sold in the market. And a higher stock turnover means that it’s easier to trade the stock without its price getting affected too much. Over the last 6 months, Trent’s average daily turnover was about ₹470 crores, while Bajaj Finserv’s was around ₹320 crores. So, Trent looks stronger here too.

But let’s for a moment also look at the real buzz that’s happening inside these companies.

Trent’s stock has been on a roll, skyrocketing 160% this year, driven by its fast-fashion brand Zudio. Zudio now makes up for a huge chunk of Trent’s revenues, with sales up 50% and profits soaring 275% in FY24. And thanks to its low-cost franchise-owned company-operated model (FOCO), the company keeps expenses down while scaling up fast — now boasting 560 stores across India.

Bajaj Finserv, meanwhile, had a more modest run, rising 19% which is the same as Sensex’s return in 2024.

Now this doesn’t mean that Bajaj Finserv’s business is not moving or underperforming. It just shows that it’s not catching the same buzz as Trent.

And there will be a lot of things changing if these stocks do make the cut, among the other contenders.

See, when a company gets added to the Sensex, it’s like getting picked for the national team. Mutual funds, foreign investors and big money start flowing in. Stock prices often rise, and the company becomes the talk of the town. Just look at Adani Ports when it was added. It saw a sharp rise in stock price, and analysts predicted massive fund inflows that changed the stock’s valuation. But if a company gets dropped, it can trigger fund outflows.

And as a shareholder, this could affect you too. Because mutual funds and exchange traded funds (ETFs) that replicate the Sensex have to adjust their holdings when the Sensex reshuffles to match the exact representation. This translates into a lot of money flowing in and out of these stocks.

Right now, the finance sector, in which Bajaj Finserv operates, accounts for about 36% of the index weightage.² If the stock gets dropped, it could shake up both the sector weightage as well as the index. On the flip side, if Trent gets added, it could be a huge boost for the retail sector, which currently has no representation in the index.

And the numbers back it up. When Trent was recently added to the Nifty 50 index in September, analysts predicted passive inflows of over ₹3,900 crores.³

Now for the upcoming Sensex reshuffle in December, estimates suggest inflows of about ₹3,700 crores into Trent and outflows of nearly ₹2,100 crores from Bajaj Finserv. That’s big money.

So yeah, this index reshuffling shows us how top companies, with strong growth, high liquidity, and good public ownership, are added to the Sensex every six months. And it reinforces why index investing through Sensex or Nifty, is one of the safest ways to build wealth, as you’re backing India’s leading companies.

In a way, the reshuffle ensures the Sensex reflects the survival of the fittest. Companies like HUL, L&T, ITC and Reliance have been part of it since 1986, proving their strength.

But that might make you wonder — does the Sensex really capture the full picture of the economy?

Well, we can’t say so. Because the Sensex represents just 30 companies selected based on specific criteria, while many other businesses are also driving India’s growth.

So, a better way to think of the Sensex would be to see it as a momentum strategy of top Indian stocks. It keeps getting updated to include companies with the best performance and potential, ensuring it always reflects the most relevant players.

But wait… does this rebalancing strategy really work?

What if you had just bought the original 30 Sensex stocks and held onto them forever? Could you beat the reshuffled portfolio?

You could take a cue from the US, where the S&P 500, an older and more mature index, goes through regular reshuffling. A fascinating test was conducted where the stocks of the S&P 500 were picked from 1993 and left untouched for 30 years.⁴ And guess what? The “Do Nothing” portfolio actually outperformed the S&P 500 itself and that too with less volatility! Even without newer names like Tesla and Domino’s, the old portfolio still outshined.

But before you get too excited, this isn’t some foolproof strategy. For instance, if you only bought the top 10 stocks instead of all the S&P 500 stocks, you’d have underperformed the S&P 500 by a huge margin.

So, that’s the deal with index rejigs and how they can influence stocks and your market returns.

It’s important, but it’s not a silver bullet. And while this test worked in the US, we’d need to run similar tests in India with Sensex companies to draw any conclusions. If that happens, maybe it’ll be a story for another day?

In the meantime, we’ll just have to wait and see if Trent and Bajaj Finserv make it through the reshuffle, especially with companies like Zomato eyeing a spot in the Sensex if it joins the derivatives market. Even if they do make it, they might not drastically move the index. But their inclusion (or exclusion) could still spark significant fund flows and stock price shifts. But whether our guess hits or misses the mark is something we’ll find out only in November, when the stock names for the rejig will be revealed.

Until then…

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Story sources: Business Standard [1]; BSE [2], Financial Express [3]; Market Sentiment [4]

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