What is Dow Jones & How is it related to Indian Stock?

Dow Jones Industrial Average (DJIA) is a stock market index that represents the top 30 well-established public-owned companies on the New York Stock Exchange and Nasdaq.

A Brief History Of Dow Jones Industrial Average

• This is the second-oldest US market index coming after the Dow Jones Transportation Average.
• The Dow Jones Industrial Average only represented bluechip companies having a stable financial background. It started with only 12 companies in 1986. Now 30 companies have been added to the list. The composition of the DJIA changes with the change in the economy. If a component of the Dow drops and becomes less relevant to the current trends of the economy, it will be dropped and replaced with a new name that matches the new trend better.

Dow Jone Relation With Indian Stock Market

Being an Indian investor, if you want to invest domestically only, there is a chance of risk due to not holding a well-diversified portfolio. Not only that, but you will also not be able to take advantage of the currency play. 

“There is a high correlation between the Indian Markets and the US Markets in local currency terms in both the short term and the Long term. However, in constant currency terms the Indian Markets have lagged the US markets as the INR depreciation has impacted the performance of the Indian Markets negatively,” informs Ashish Ranawade, Head of Products, Emkay Wealth Management

If we talk about the correlation of DJIA and Sensex in the last 10 years, their correlation coefficient comes out to be 0.36. This means that there is a positive correlation between both markets. Though there is a positive correlation coefficient, the correlation level is less. A low correlation makes it perfect for Indian investors to invest in the US stock market. “The correlation between the US and the Indian market (adjusted for foreign exchange rate) has been between 0.1 and 0.2 over the last 20 years. This is important to note because, the lower the correlation, the higher is the diversification providing stability in a portfolio,” says Anup Bansal, Chief Investment Officer, Scripbox

A geographically diversified portfolio, especially if it includes US stocks, can bring stability in your returns. As both the economy, US and India, have a strong future ahead, diversification will help you to manage risk as well.

For the last ten years, before 2020, the Sensex has grown by 9.5% CAGR and Dow Jones has grown by 10.87%. This implies that it is beneficial to invest in the US stock market. 

In conclusion:

So before investing in a US stock to diversify the portfolio, make sure to make your own diversification strategy to get the maximum benefit out of it and reduce the risk.