The term NIFTY is derived from the combination of National and Fifty as Nifty consists of 50 actively traded stocks. Nifty is primarily an equity benchmark index which was introduced on April 21, 1996, by National Stock Exchange. Nifty is an abbreviation of the National Stock Exchange Fifty, it is the broad index of the National Stock Exchange (NSE). NSE is a leading stock exchange in India.
**Now let’s see what is Nifty?**
Nifty generally comprises fifty actively traded stocks but currently, there are fifty-one stocks. Nifty is also known as Nifty50 or CNX Nifty. Nifty is owned by India Index Services and Products Ltd. (IISL). IISL is India’s specialized company which focuses on an index as its core product. It is one of the largest financial products with an ecosystem of ETF, ETF F&O and other index funds and OTC derivatives.
When the Nifty was launched in 1995, it had a base value of 100, being the weighted index of 50 stocks of that time. Over the years, the stocks have changed and Nifty’s value also has gone up.
Till 2009, the weights of the shares were calculated based on their market capitalization but now it is calculated on their respective free float basis.
Calculation of Nifty:
Nifty is calculated by “Free-float market capitalization” methodology and market capitalization is calculated by multiplying the market price of share with a number of outstanding shares.
Free float market capitalization is calculated by multiplying the free float factor with market capitalization. Free float refers to the shares that are readily available for trading in the market.
The calculation of NIFTY involves dividing the free-float market capitalization of 50 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the Nifty.
It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrips etc.
During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate NIFTY every 15 seconds. The value of NIFTY is disseminated in real-time.
**What are the criteria for selection of stocks?**
Liquidity: For inclusion in the index, the security should have traded at an average impact cost of 0.50 % or less during the last six months, for 90% of the observations for a portfolio of Rs. 2 crores. Impact cost is the cost of executing a transaction in a security in proportion to its index weight, measured by market capitalization at any point in time.
Float-Adjusted Market Capitalization: Companies eligible for inclusion in the NIFTY 50 must have at least twice the float-adjusted market capitalization of the current smallest index constituent.
Domicile: The company must be domiciled in India and trade on the NSE.
Eligible Securities: All common shares listed on the NSE (which are of equity and not of a fixed income nature) are eligible for inclusion in the NIFTY 50 index. Convertible stock, bonds, warrants, rights, and preferred stock that provide a guaranteed fixed return are not eligible.
Differential Voting Rights: Equity securities with Differential Voting Rights (DVR) are eligible for inclusion in the index subject to fulfilment of certain criteria.
F&O criteria for stocks in NIFTY 50: In order to become eligible for inclusion in NIFTY 50, a stock must be available for trading in NSE’s Futures & Options segment.
Other Variables: A company which comes out with an IPO is eligible for inclusion in the index if it fulfils the normal eligibility criteria for the index – impact cost, float-adjusted market capitalization for a three-month period instead of a six-month period. The company’s trading frequency should be 100% in the last six months.
Timing of Changes: The index is reviewed semi-annually, and a four-week notice is given to the market before making any changes to the index constituents.
Additions: The complete list of eligible securities is compiled. After that, the liquidity (impact cost) and float – adjustment filters are applied to them, respectively. The top-ranking companies form the replacement pool. The top stocks, in terms of size (float-adjusted market capitalization), are then, identified for inclusion in the index from the replacement pool.
Deletions: Stocks may be deleted due to mergers, acquisitions or spin-offs. Otherwise, as noted above, twice a year a new eligible stock list is drawn up to review against the current constituents. If this new list warrant changes in the existing constituent list, then the smallest existing constituents are dropped in favour of the new additions.
**How can I invest in Nifty?**
Investing in NSE is not the same as making an investment in Nifty. If you invest in the Nifty index, it gives you the opportunity to enjoy the growth and reap benefits from the entire bunch of 50 stocks. There are numerous ways in which you can invest in Nifty-
1. Spot Trading– You can buy the Nifty script, which is the most simple and straightforward way of investing in Nifty. This is the equivalent of buying the equity shares of various listed companies. Once you become an owner of the stock, you can reap the benefits from various price movements of the index, which result in capital gains.
2. Derivative Trading– Financial contracts that obtain their value from an asset that is underlying are called derivatives. These assets could be anything- indices, stocks, currencies or commodities.
The parties involved agree on a future date to settle their contract. Profit is made by speculating on the value the underlying asset will attain in the future. To trade directly in the Nifty index two kinds of derivatives are available- futures and options.
*Nifty Futures: In a futures contract, the buyer and seller agree to buy or sell the nifty contract on a future date. During the period of the contract, you can sell it and make a profit if you see that the price has gone up. If the price goes down, you can wait it out till the date of settlement.
*Nifty Options: In a contract of this type, the buyer and seller agree upon buying and selling the Nifty stock in the future, at a price they decide upon in the present. The buyer of this contract pays a sum as premium and obtains legal rights to buy or sell the Nifty share in the future. But, this is a right, and not a compulsion, so, the buyer can choose to not take action if the price is not favourable to him.
3. Index Funds– Index funds are a kind of mutual fund whose portfolio is designed to increase market exposure. This is done by creating a portfolio to match the parts of the market index in such a fashion that it offers a wider exposure in the market. Such funds also invest in Nifty, amongst other indices.
The increase in popularity of the Nifty index in the last few years has attracted a variety of investors from retail, institutional and foreign areas. These investors invest in Nifty through index funds or directly. These factors make Nifty an attractive option if you are searching for a new avenue of investment.
**Nifty Fifty Sectors**
1) Nifty Auto Index
The Nifty Auto Index is designed to reflect the behaviour and performance of the Automobiles sector which includes manufacturers of cars & motorcycles, heavy vehicles, auto ancillaries, tyres, etc. The Nifty Auto Index comprises of 15 stocks that are listed on the National Stock Exchange.
2) Nifty Bank Index
Nifty Bank Index is an index comprised of the most liquid and large capitalised Indian Banking stocks. It provides investors and market intermediaries with a benchmark that captures the capital market performance of Indian Banks. The index has 12 stocks from the banking sector which trade on the National Stock Exchange.
3) Nifty Consumer Durables Index
The Nifty Consumer Durables Index is designed to reflect the performance of stocks belonging to the Consumer Durables industry. The Nifty Consumer Durables Index comprises of a maximum of 15 stocks that are listed on the National Stock Exchange.
4) Nifty Financial Services Index
The Nifty Financial Services Index is designed to reflect the behaviour and performance of the Indian financial market which includes banks, financial institutions, housing finance, insurance companies and other financial services companies. The Nifty Finance Index comprises of 20 stocks that are listed on the National Stock Exchange (NSE).
5) Nifty Financial Services 25/50 Index
The Nifty Financial Services 25/50 Index comprises of same constituents as Nifty Financial Services Index, where 25 refers to the maximum value for the % weight of a single stock and 50 refers to the maximum value for the aggregate % weight for all stocks with individual weight more than 5%.
Nifty Financial Services 25/50 Index – Gaining diversified exposure to the Financial Services sector (.pdf)
6) Nifty FMCG Index
FMCGs (Fast Moving Consumer Goods) are those goods and products, which are non-durable, mass consumption products and available off the shelf. The Nifty FMCG Index comprises of a maximum of 15 companies who manufacture such products which are listed on the National Stock Exchange (NSE).
7) Nifty IT Index
Information Technology (IT) industry has played a major role in the Indian economy. In order to have a good benchmark of the Indian IT sector, NSE Indices has developed the Nifty IT sector index. Nifty IT provides investors and market intermediaries with an appropriate benchmark that captures the performance of the IT segment of the market.
Companies in this index are those that have more than 50% of their turnover from IT-related activities like IT Infrastructure, IT Education and Software Training, Telecommunication Services and Networking Infrastructure, Software Development, Hardware Manufacturer’s, Vending, Support and Maintenance.
8) Nifty Media Index
The Nifty Media Index is designed to reflect the behaviour and performance of the Media & Entertainment sector including printing and publishing. The Nifty Media Index comprises of stocks that are listed on the National Stock Exchange (NSE).
9) Nifty Metal Index
The Nifty Metal Index is designed to reflect the behaviour and performance of the Metals sector including mining. The Nifty Metal Index comprises of a maximum of 15 stocks that are listed on the National Stock Exchange.
Effective September 28, 2015, the weights of each company in the index are capped at 20%. At the time of rebalancing of shares/ change in index constituents/ change in investable weight factors (IWFs), the weightage of the index constituent (where applicable) is capped at 20%. Weightage of such stock may increase beyond 20% between the rebalancing periods.
The Nifty Metal Index represents about 2.6% of the free-float market capitalization of the stocks listed on NSE and 87.9% of the free-float market capitalization of the stocks forming part of the Metals universe as on March 31, 2016.
The total traded value for the last six months ending March 2016 of all index constituents is approximately 4.5% of the traded value of all stocks on NSE and 89.8% of the traded value of the stocks forming part of the Metals universe.
10) Nifty Oil & Gas Index
The Nifty Oil & Gas Index is designed to reflect the performance of the stocks belonging to Oil, Gas and Petroleum industry. The Nifty Oil & Gas Index comprises of a maximum of 15 stocks that are listed on the National Stock Exchange.
11) Nifty Pharma Index
The pharmaceuticals sector is one of the key sectors where Indian companies have created a global brand for themselves besides software. Indian companies have taken advantage of the opportunities in the regulated generics market in the western countries and made deep inroads especially in providing low-cost equivalents of expensive drugs.
Pharma outsourcing into India and low-cost Healthcare services are expected to be the key areas of growth in the near future. In addition, the inherent potential of biotechnology has also attracted many new companies and this is also a key growth area for Indian companies. NSE Indices has developed Nifty Pharma Index to capture the performance of the companies in this sector.
12) Nifty Private Bank Index
The Nifty Private Bank Index is designed to reflect the performance of the banks from the private sector. The Nifty Private Bank Index comprises of 10 stocks that are listed on the National Stock Exchange (NSE).
13) Nifty PSU Bank Index
The Indian banking system, reaping the benefits of strong credit off-take and improved risk management practices.
The public sector banks with their existing widespread branch network have been primarily increasing their IT related expenditure. The core profitability of the public sector banks continues to rise on the back of improving operating efficiencies.
Consolidation would further improve PSU banks’ competitive edge against their private counterparts in servicing customers — both retail and corporate — in the international and domestic markets. Recognizing these changing dynamics of the Indian banking industry, NSE Indices has developed Nifty PSU Bank Index to capture the performance of the PSU banks.
14) Nifty Realty Index
Real estate sector in India is witnessing significant growth. Recent dynamics of the market reflected the opportunity of creating wealth across real estate companies, as proven by recent listings of real estate companies resulting in prominent growth in public funds and private equity.
The main growth thrust is coming due to favourable demographics, increasing purchasing power, the existence of customer-friendly banks & housing finance companies, professionalism in the real estate sector and favourable reforms initiated by the government to attract global investors.
Further necessitated by the thrust of the redevelopment of old buildings, building townships and redeveloping mill lands, one can witness plenty of opportunities in the real estate sector backed by favourable tax regime. NSE Indices has developed the Nifty Realty Index to synergize these emerging opportunities along with their Index expertise creating new investment avenues for investors.
How can I calculate the weightage of a company in Nifty 50?
Below is the updated list of Nifty 50 companies based on their weightage in the index:-
Reliance Industries Ltd. – 11.88%
HDFC Bank Ltd. – 10.34%
Housing Development Finance Corporation Ltd. – 7.20%
Infosys Ltd. – 6.35%
ICICI Bank Ltd. – 5.39%
Tata Consultancy Services Ltd. – 5.20%
ITC Ltd. – 4.32%
Kotak Mahindra Bank Ltd. – 4.11%
Hindustan Unilever Ltd. – 3.69%
Bharti Airtel Ltd. – 3.10%
Larsen & Toubro Ltd. – 2.89%
AXIS Bank Ltd. – 2.18%
Asian Paints Ltd. – 1.90%
Maruti Suzuki India Ltd. – 1.87%
Nestle India Ltd. – 1.57%
State Bank of India – 1.55%
HCL Technologies Ltd. – 1.50%
Bajaj Finance Ltd. – 1.30%
Sun Pharmaceutical Industries Ltd. – 1.28%
Dr Reddy’s Laboratories Ltd. – 1.24%
NTPC Ltd. – 1.19%
UltraTech Cement Ltd. – 1.13%
Mahindra & Mahindra Ltd. – 1.05%
Power Grid Corporation of India Ltd. – 1.01%
Britannia Industries Ltd. – 1.00%
Titan Company Ltd. – 0.93%
Bajaj Auto Ltd. – 0.89%
Cipla Ltd. – 0.83%
Tech Mahindra Ltd. – 0.82%
Wipro Ltd. – 0.79%
Hero MotoCorp Ltd. – 0.77%
Oil & Natural Gas Corporation Ltd. – 0.76%
Coal India Ltd. – 0.74%
Shree Cement Ltd. – 0.70%
Bharat Petroleum Corp. Ltd. – 0.69%
Bajaj Finserv Ltd. – 0.67%
Adani Port and Special Economic Zone – 0.63%
IndusInd Bank Ltd. – 0.60%
Eicher Motors Ltd. – 0.58%
Grasim Industries Ltd. – 0.58%
Tata Steel Ltd. – 0.56%
UPL Ltd. – 0.56%
Indian Oil Corporation Ltd. – 0.53%
Hindalco Industries Ltd. – 0.51%
Bharti Infratel Ltd. – 0.49%
JSW Steel Ltd. – 0.47%
GAIL (India) Ltd. – 0.43%
Vedanta Ltd. – 0.42%
Zee Entertainment Enterprises Ltd. – 0.42%
Tata Motors Ltd. – 0.39%