FTSE 100: Understanding UK'S Large Cap Index

When people think about global stock markets, the FTSE 100 often comes up as a major index that tracks the performance of Britain’s top 100 listed companies. For Indian investors, understanding the FTSE 100 may open fresh perspectives on international diversification, potential growth opportunities, and economic trends far beyond local markets. In this article, we’ll unpack how the FTSE 100 works, how its companies may grow and pay dividends, and practical ways to begin investing in it.​

Table of contents

• What is FTSE 100?
• Why should Indian investors care about the FTSE 100?
• Understanding the growth and dividends of FTSE 100
• FTSE 100 vs FTSE 250: What’s the difference?
• Investing in FTSE 100: How to get started

What is FTSE 100?

The FTSE 100 (Financial Times Stock Exchange 100) is a stock market index that tracks the performance of the 100 largest companies (by market capitalisation) listed on the London Stock Exchange (LSE) that meet liquidity and other eligibility criteria.

It is a capitalisation-weighted index, meaning that companies with higher market value carry greater influence on its movement. The index is updated in real time during trading hours and is reviewed quarterly to adjust its constituents. Because many of these companies are global in scale, a substantial portion of their revenue comes from outside the UK.

Why should Indian investors care about the FTSE 100?

You might wonder: why look at a British index when we have Indian indices like Nifty 50 or BSE Sensex? Here are a few possible reasons:

• Diversification: Exposure to a developed market index like FTSE 100 gives you access to sectors, geographies, and business cycles different from those in India.
• Global growth participation: As many FTSE 100 constituents derive revenues from multiple countries, you may potentially benefit from growth outside India without directly picking foreign stocks.
• Currency factor: If the British pound strengthens against the rupee, your potential returns (in INR) may get a boost (and conversely, currency weakness may dampen potential returns).
• Income potential from dividends: The FTSE 100 comprises large cap companies that tend to be well established firms that may potentially pay regular dividends.
• Benchmarking and global orientation: Tracking FTSE 100 may help you evaluate how your international allocations are performing relative to a major developed market index.

However, returns are not guaranteed; markets fluctuate, and currency risk matters.

Understanding the growth and dividends of FTSE 100

Price growth vs total return: The Price version of the FTSE 100 typically only reflects capital appreciation or depreciation (i.e., changes in share prices of its constituents). But a more comprehensive measure is the total return index, which also includes dividends reinvested. Because dividends can contribute materially over long time horizons, the total return version typically shows more compounding. This is relevant for investors who follow a buy-and-hold strategy instead of using the dividends for income.

Dividend yield and trends: Dividends tend to be relatively more stable in large, mature companies, which many FTSE 100 firms are. That said, in weak economic periods, some companies may cut or withhold dividends.

FTSE 100 vs FTSE 250: What’s the difference?

Below is a comparison of the two indices to help you understand their distinct characteristics.

Investing in FTSE 100: How to get started

While there is no mutual fund or ETF in India offering direct exposure to FTSE 100, here are some alternative pathways:

• International mutual funds: Some Indian funds of funds invest in global equities, which may include allocations to UK large cap equities indirectly. Check their portfolio disclosures for details.
• Cross-listed index funds or ETFs: Some global ETFs track FTSE indices. You could invest via a foreign broker that allows investing in UK-listed ETFs or funds that replicate FTSE strategies.
• FDIs / Overseas portfolio allocation via platforms: Indian brokers offering overseas equity access may allow buying UK stocks or ETFs directly. You need to comply with the Liberalised Remittance Scheme (LRS).
• Use of Global Depository Receipts (GDRs): Some UK firms issue global depository receipts that trade on international exchanges; Indian investors may access those via global platforms.

What you may check before investing:

• Expense ratio / management fees of the fund.
• Tracking error relative to FTSE 100.
• Currency hedge or exposure (whether the fund hedges GBP/INR or not). This is not typically available in Indian mutual funds but may be offered by international ETFs.
• Dividend withholding tax / foreign tax implications.
• Liquidity and ease of entry/exit.
• Regulatory compliance

Also note: returns in rupee terms will depend heavily on currency fluctuations.

Conclusion

The FTSE 100 is not just a UK benchmark; it may play a useful role in a globally diversified portfolio. Its mix of mature, potentially dividend-paying companies and international operations may make it suitable for investors seeking foreign exposure. That said, it comes with currency risk, dividend variability, and the requirement to choose suitable investing vehicles. Before committing capital, it is recommended to compare costs, structure, and your own goals.

Frequently Asked Questions

What types of companies are included in the FTSE 100?

The FTSE 100 contains large UK-listed companies spread across multiple industries such as (but not limited to) energy, finance, consumer goods, pharmaceuticals, and telecom. Companies must meet a minimum market capitalisation, a minimum level of liquidity, and free float percentage to be included in the FTSE 100.

How can I track the performance of the FTSE 100?

You may follow financial news sites or platforms that publish the FTSE 100’s price index and total return versions in real time. The index is updated continuously during UK trading hours.

What is the difference between the FTSE 100 and FTSE All-Share Index?

The FTSE All-Share Index aggregates the FTSE 100, FTSE 250, and FTSE small cap indices, covering most (around 98 %) of UK equity market capitalisation. It thus offers a broader measure than just the top 100.

How often is the FTSE 100 updated?

The index is updated in real time during trading hours. Its constituent list is reviewed quarterly, when companies may be added or removed based on changes in market capitalisation and eligibility criteria.

Mutual Fund investments are subject to market risks. Please read all scheme-related documents carefully.

This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.

The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Ltd. does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed. The tax information (if any) in this article is based on current laws and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.