What is NIFTY 50? How to Buy NIFTY 50 Index? And Nifty 50
Stocks.
INTRODUCTION
When traders
unless one manager speculators punters you me when we use the t
· WHAT IS NIFTY 50
The
nifty 50 represents the weighted average of India’s top 50 companies that are listed on the national Stock
Exchange. In fact this term nifty 50 is a short form of the national Stock
Exchange 50, but over the years it has been shortened even further and today
most people simply referred to it as the nifty so the nifty 50 is a market
index unlike and like any index it represents a portfolio of investment
holdings which happens to be the bluest of blue chip companies after all we are
talking about companies like Reliance Industries the State Bank of India, Maruti
Suzuki, TCS, Asian paints at 45 other industry leading companies in fact the
time of write this article these 50 companies together had a total market
capitalization of over 1.35 crore crores which represents between 55 to 60% of
the market capitalization of all companies listed on the national stock exchange
the nifty’s importance in the financial markets also allows for lot of innovation
around it for instance a number of mutual funds use the nifty as its benchmark
in fact there is an entire ecosystem of products around the nifty which
includes onshore and offshore exchange traded funds, exchange traded options,
futures and a host of other services making the nifty 50 the world's most
actively traded contract.
· THE NIFTY,THEN & NOW
Here's a question for you the nifty was
introduced by the national Stock Exchange in the year 1996 which makes it a good 25 years old
so, the question is off the Orissa list that is the list of 50 stocks compiled
in 1996 how many of those companies are still present in the nifty after 25
years to help you out here this 2021 list and now you got to think no wait first you need to pause this articel
and then think which of these companies might have been in existence in 1996
and was significant enough at that time to be apart of the top 50 list 25 years
back .
the number of
companies that are celebrated 25 years of existence in the nifty and the usual suspects are all there
there’s HDFC, reliance, SBI, ITC a couple of tata companies etc. but the bulk
of the company’s a good 75% of them have either merged with others or have
simply lost relevance overtime in fact here’s a list we found on the original
nifty companies of 1996 and some of the names did come as a surprise names like
proof bond Lipton ,Ranbaxy, Arvind mills, ponds India, Colgate, Indian hotels
and what’s missing here are the many banks and IT companies that make up the
bulk of today's nifty in fact comparing the 1996 table with a 2021 table shows
us how India has moved from being a manufacturing economy to a service is one
over these last 25 years the point is that companies that represent the nifty do
change on the index has seen almost 100 changes in its constituents of the last
winter half decades.
· HOW ARE NIFTY 50 STOCK
SELECTED?
The nifty has a very well defined and transparent methodology of
selecting this
constant company in fact the selection process can be examined in four parts
1. the
universe of companies
2. the
basic construct
3. the
liquidity rules
4. and
the re balancing and reconstitution rules
let’s
start with the universe of stocks and should come as no surprise that a company should be compulsory listed
on the national Stock Exchange for it to be a part of the nifty more
importantly the company should also be available for trading in NSE’s futures
and options segment in terms of the basic construct the selected companies have
to be in the top 50 companies in terms of their free float market
capitalisation now understanding this word free float is important and it quite
simply means those shares or that proportion of the capital that is publicly
traded in other words anyone gets buy or sell the shares and they’re not
blocked or restricted by company insiders like the promoters strategic partners
employee welfare trust or even the government a good example of this is Wipro
limited with 73% of the shares are controlled by azeem premji and his family
which makes these 73% shares inaccessible to the general public so put in
numbers at the time of recording this article with pros total market capitalisation
was three lakh 15,000 cr. however its free float capitalization was only 27% of
that which comes to 85,000 crores which means from an index calculation
perspective it is 85,000 crores which will be considered in determining wipro’s
weightage in the nifty 50 so different companies have a different level of free
float measuring from as low as 25% of the total market cap to as high as 98%.
The third area of consideration when selecting nifty 50 stock
its liquidity and this is where only those companies are considered as trading volumes are always high
and the final selection component is the semi annual rebalancing exercise that
determines which stocks a within the nifty which new ones come in and which of
the existing companies move this process happens in June and December of every
year and is an important exercise as he wants to nifty to be an accurate
representation of India’s largest and India’s finest companies in fact a case
in point is how the sectoral makeup of the nifty has changed over the years for
instance at the time of inception that nifty had articel technology companies
and had just one private bank today the stock end companies will misty has four
banks in the private sector and two IT outsourcing giants in the form of
Infosys and TCS and speaking about sectors the nifty carries representation
from 13 different sectors although the financial and It companies make up 55%
of the index but it should not come as any surprise that the nifty will have a
very different form and shape another 5, 10&20 years from now when we see
new sectors and new companies emerging like there is no insurance five years
back but now it’s similarly e-commerce and Internet companies were privately
held but now we have a new motto which is likely to be followed by a Flipkart, Paytm
byju’s and other new age consumer facing businesses and while that happens and
the nifty continues to change shape we have no doubt that nifty will continue
to serve as one of the primary parameters of our country's prosperity.
PERFORMANCE OF NIFTY 50
THE nifty 50 started its journey from a
base value of 1000 points and today is on the verge of touching 17,000 points that CAGR of
11.7% over these 25 years. which is a lot higher than other asset classes like
gold and real estate which have delivered between 8 and 9% during the same time
period.
Now given the nature of equity
markets the nifty 50 has witnessed many ups and downs like in the year 2008,
when the nifty dropped by over 50% only to win back a lot of fit in the very
next year in fact more often than not the nifty has deviated from its long term
means of 11.7% but the most satisfying static here is that the nifty has had
only seven negative years in the last 25 years. which speaks a lot of its
utility as a long term wealth building tools now why is this analyse return of
11.7% helps us a more practical way of
determining performance over longer durations is to be able to do so using the SIP
mode after all investors like you and me we just don't put in some lumps and
money in mutual funds and forget about it for the next 25 years. we continue to
invest and mostly on a monthly basis and if one had invested ₹10,000 in the
nifty every single month from 1996 onwards here's how the journey would have
been the first few years would have been a bit frustrating on account of
the.com bubble and it won't be uncle June of 2003 when you’re invested amount
would actually start showing some sort of returns in sharp contrast the period
from mid 2003 until the end of 2017 was a rainmaker. For the nifty and your
copper would have zoomed from 9 lakhs to 64 lakhs in just four and half years.
But what goes up needs to
come down and what followed next was a period of deep correction quick recovery
and flat markets which means the nifty took the next five and a half years to
register a new all-time high which happened somewhere around August of 2013 and
since then the nifty has seen the most amazing of market rallies with our SIP
corpus swelling to 2.07 crores as of June 2021. The point is that the nifty and
for that matter any stock market would have periods of ups and downs and even
this bull run has seen some hiccups like the 2015, Chinese market meltdown,
demonetization in November 2016 and of course a massive 1100 points drop on
March 23rd 2020 due to the covid pandemic but the fact remains that
a 25 year old SIP on the nifty motored along very well through these peaks and
troughs and you’re 30 lacks investment would have delivered a wealth corpus of
2.07 crores at a CAGR of 12.8%.
Now
the past is the past and the real question is what can we expect from the nifty
in the coming 25 years? Well firstly one can expect the future to be
even bigger with sectors like e-commerce, autonomous vehicles, logistics,
artificial intelligence, robotics, defence and renewable energy all rising to
create the biggest companies of our time and secondly from a numbers
perspective the Indian GDP is expected to grow at around five and a half
percent over the next 25 years this growth trajectory would make India an
economic powerhouse by 2050. With 15% of the world's GDP and one of the
biggest representation of this power will continue to be the nifty 50.
HOW TO INVEST IN NIFY 50
There are two ways to invest in the nifty
YOU can buy stocks in the same percentage as its composition in the
nifty 50 what
options do is that you can invest in an index mutual fund that tracks the nifty
50 the first approach stop buying one is not really made for the average retail
investors it is expensive, it is hectic and it’s pretty complicated for example
say I want to invest ₹10,00,000 in buying all the stocks that are there in the
nifty and in the same ratio now the weightage for one of the nifty stocks that
is shri cement is 0.4% which comes to ₹4000 but the problem we face here is
that at the time of writing this article one share of shri cement is priced at
₹28,000 which kind of puts us in a soup because fractional ownership of shares
is not allowed in India. which means we cannot buy one 7th of shri
cement share to stay within our ₹4000 limit so we have to buy zero shares of shri
cement or one entire share of shri cement none of which helps us in our
objective of recreating the index. few more problems like this but using the
direct quoting route and This is why most investors prefer to use ETS or index
funds to invest in this Nifty 50 an index fund is a mutual fund which has only
one job that is to replicate their respective benchmark so nifty 50 index would
look to replicate the nifty 50 and therefore will have a portfolio similar to
the nifty 50, I specifically use the words similar and not exact because as we
have in our tracking error article seems that there is always some small
variance between the index movement and the index funds movement but net net a
nifty index fund will have the same 50
stocks which are there in the nifty they will be almost in the same proportion
and the performance of the index fund will be similar to the nifty’s price
movement more recently consumer interest in investing while index funds has
grown in India and there are many reasons for that firstly you can start your
investment on the et money app at justice ₹500 a month and even ₹100 with some
schemes secondly these funds have in sip facility and we discussed earlier in
this article how great it well can be generated with disciplined investing
thirdly index funds don't active management.
End of this article- if you like this presentation then
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members was just getting started with investing for your time and I look forward
to catching up with you next week with another insightful article.
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1 Comments
good , very nice i like it
ReplyDeleteThank you