Are indices good wealth creators?

The main reason why most retail investors embrace the roller-coaster behaviour of the stock market and invest in equities is long-term wealth creation. And so one of the key questions that an investor must examine before deciding to buy a passive fund is if its portfolio composition and strategy can create good long-term wealth. In this context, the Nifty 50 and Sensex, on which most passive products are based, suffer from four constraints. One, India's index providers decide on the key constituents for the Sensex and Nifty 50 based on criteria such as free float market capitalisation, liquidity and impact costs. But for a fundamental investor looking to own long-term wealth creators, these aren't the best indicators of good buys. Instead, picking stocks based on selection criteria such as return on equity, free cash flows, profit growth, balance-sheet strength and s