Diversification Benefits of Sector Investments in Indian Capital Market

Abstract

Since inception of sector indices in India there hasn’t been sufficient and adequate study done to understand the benefits of sector investments and their diversification. This paper analysis the risk, return and diversification benefits of Indian sector investments. Fast moving consumer goods (BSE-FMCG), consumer durable (BSE-CD), health care (BSE-HC), and automobile (BSE-AUTO) sectors have outperformed the benchmark as well as other sectors and have provided positive alpha. But, the sectors like banking (BANKEX), technology (BSE-TECH), oil and gas (BSE-OILGAS), infotech (BSE-INFOTECH), and metal (BSE-METAL) had negative alphas. Mean variance optimization analysis indicates that fast moving consumer goods (48.04%), consumer durable (47.37%), and health care (4.56%) sectors should have maximized the risk adjusted performance measures (Sharpe Ratio, Trenor’s Ratio, Information Ratio).