I recently met a stockbroker who said most market players had lost money despite being on the right side of the index. I find that hard to believe. Was he fibbing?

No he wasn't. Most players have lost money and this, despite taking 'long' positions. Their losses mount with every trade. And the indices bounce back effortlessly from any fall. The explanation for this seeming contradiction is straightforward: market indices are being manipulated by movements in six stocks, HLL, ITC, Reliance Industries, Infosys, Satyam, and Wipro.

There's a rumour doing the rounds that the strange phenomenon of the Sensex falling and the Nifty rising on September 9 was caused by some movement in the Wipro stock. Any truth to this?

You're right. On September 9, the BSE Sensex fell by 50 points. The moratorium on the disinvestment of oil majors HPCL and BPCL, announced on September 7, was responsible for the drop in the Sensex. However, the Nifty seemed immune to this and actually rose 3.5 points. The reason? Some rumours regarding Wipro (it is part of the Nifty, not of the Sensex). "We are aware of the Wipro incident," says the SEBI spokesperson, "and are investigating the matter".

I thought the Nifty couldn't be manipulated, but September 9 has changed my mind. What about you?

Well, cynics that we are, we didn't really believe anything could be above manipulation, so the event (or possible event, since it still remains unsubstantiated) didn't surprise us much. That said, the Nifty is computed based on objective parameters. The method used is the market capitalisation weighted one, where the level of the index reflects the total market value of all the stocks that are part of it relative to a particular base period. "The weightages given to individual stocks is based on the impact cost on each stock," elaborates Arup Mukherjee, Manager, Indices, NSE. Impact cost is a slightly complex term, and is best explained through an example and the NSE website conveniently provides one. So here goes. "Suppose a stock trades at bid 99 and ask 101. We say the ''ideal'' price is Rs 100. Now, suppose a buy order for 1,000 shares goes through at Rs 102. Then we say the market impact cost at 1,000 shares is 2 per cent. If a buy order for 2,000 shares goes through at Rs 104, we say the market impact cost at 2,000 shares is 4 per cent. Market impact cost is the best measure of the liquidity of a stock. It accurately reflects the costs faced when actually trading an index. For a stock to qualify for possible inclusion into the S&P CNX Nifty, it has to reliably have market impact cost of below 1.5 per cent when doing S&P CNX Nifty trades of half a crore rupees."

If indices can be manipulated, should investors look to invest in index funds at all?

First, the basics. The rationale behind investing in an index fund is that it is a good proxy of the market's performance. The past two months, however, have shown anyone who has watched the market even with passing interest that the link between the index and the market as a whole is, at best, tenuous. That, though, doesn't mean you should not consider investing in an index fund. As Rajan Mehta, the executive director of Benchmark Mutual Fund-it recently launched an open-ended exchange traded index fund, Nifty bees-says, "The idea of an index fund is to average out movements and this happens automatically". In layspeak that means an upward movement in one stock, or a downward one in another will not impact investors in index funds. Still, it is worth noting that over the past two months, the indices have outperformed the rest of the market-something that has benefited investors in index funds. And it is equally worth noting that at another point in time in the not too distant future, the indices may underperform the market if a few heavyweight stocks (like the six named) are hammered.