What is it?How did it come about?Why does it matter?What next?

Nifty, which is the benchmark equity index of the National Stock Exchange (NSE), breached the 10,000 mark for the first time ever on July 25. It has managed to stay above the level since then, while touching an intra-day high of 10,137.85 on August 2.

It took the index close to 22 years to reach this level, rising from its base value of 1,000 in November 1995. Interestingly, the index took a little over nine years to move from 1,000 in November 1995 to 2,000 in December 2004. But it took less than five months to move from 9,000 on March 3 to 10,000 on July 25.

Liquidity, or money, in plain and simple terms. Institutional investors, both domestic and foreign, have been putting in huge amounts in the Indian equity markets pushing the benchmarks to hitherto unseen levels. Data from Bloomberg shows that foreign portfolio investors (FPIs) have put in $8.84 billion in Indian shares in the current calendar year (CY17). Even Japan, which enjoys a distinct status among the leading Asian economies, lags behind with net foreign flows of $6.5 billion in CY17.

Incidentally, Life Insurance Corporation, the largest domestic institutional investor, has invested about Rs. 15,000 crore in the current financial year. The insurance behemoth had invested Rs. 43,800 crore in the previous financial year in the equity segment.

Only China and Taiwan have reported higher foreign flows than India in 2017, though Indian markets have fared better in terms of returns in the current year.

It matters as many investors, especially retail, look at the performance of the benchmark indices – Sensex and Nifty – to decide on equity investments. In terms of calendar year returns, since 1996, the Nifty has gained more than 50% in four calendar years and more than 30% in seven calendar years. The index has fallen by over 20% only in two calendar years, giving positive returns in 15 out of 23 years.

The financial health of the biggest companies of India can be gauged from the performance of Nifty since it tracks the performance of a portfolio of the 50 largest and most liquid Indian securities.

The largest sectors in terms of weightage in the index are financial services, energy, information technology, consumer goods, automobiles and pharmaceuticals. The individual stocks that have the highest weightage are HDFC Bank, ITC and HDFC. In 1995, when the index was launched, State Bank of India, Hindustan Unilever and Reliance Industries accounted for the highest weightages.

Valuations hold the key as a large section of market participants feel that the markets have become hot and investors need to be cautious in their stock selection. Most analysts are advising investors to stick to large companies with a proven track record rather than blindly putting in money in the mid-cap and small-cap arena with an aim of quick returns. In a recent note, UBS said that the “risk-reward fundamentally is clearly unfavourable but we acknowledge that local retail flow can keep markets elevated despite the absence of a near-term growth recovery.”

The global financial major has end-2017 base case Nifty target of 9,000 with the downside and upside targets at 7,500 and 10,000 respectively.

Valuations are indeed a concern area. In terms of price-earnings (PE) – the most common barometer used to ascertain how expensive a market is – Nifty at 23.44 is above most other leading global indices. Asian indices like Nikkei (18.13), Hang Seng (14.37), Kospi (17.35), Shanghai Composite (17.54), Taiwan TAIEX (16.13) and Topix (15.43) all have a lower PE than Nifty. Only Jakarta Composite, Shenzhen Composite and Kosdaq of Korea have a higher PE than Nifty.

Further, most of the leading American and European indices, as well including Dow Jones, S&P 500, Euro Stoxx 50, CAC 40 and DAX have a lower PE than India's Nifty.

In terms of returns, Nifty, with its 23.44% gain in CY17, has outpaced all Asian indices, barring Hang Seng that has done marginally better at 25.28%. None of the leading American or European indices comes close to India's Nifty in terms of returns in 2017.

ASHISH RUKHAIYAR