Nifty 50 index is a broad-based index consisting of 50 large and liquid stocks listed on National Stock Exchange of India. Since inception, Nifty 50 has been the benchmark index of the Indian stock market. It has always reflected the overall conditions of the Indian stock market as well as the Indian economy. Over the years, Nifty 50 has become the most widely used benchmark for Exchange traded products in the Indian stock market.
Evolution of Nifty 50:
The index has an inception date of November 3, 1995. The index was constructed using a unique concept of impact cost, which helps in the selection of highly liquid stocks and results in the creation of a replicable index. Initially constituents were weighted on the basis of full market capitalization but from June 26, 2009 onwards, the computation was changed to free float methodology.
In total, there are 16 constituents which are ever present in Nifty 50 since inception. During that time, Nifty 50 constituents captured 62% of turnover and 34% of market capitalization of the entire equity segment of the Indian stock market. Over the years, the full market capitalization by Nifty 50 constituents has grown to 58.5%, and in terms of turnover representation has been in the range of 42% to 67%.
At the time of inception, Nifty 50 represented 13 AMFI sectors which is the same as today, though weightage in AMFI sectors has undergone significant change. IT sector was not represented at the time of inception, but as on September 30, 2015 it represents 15.7% of the index weightage. Similarly, weights of stock from financial services sector has grown from 18.2% to 31% and for Consumer goods and Metals have declined from 17.8% to 9.5% and 11.2% to 3.4% respectively.
Did you know there are 16 companies which have been present in Nifty 50 since inception?
2. Ambuja Cements
3. Bajaj Auto
4. Grasim Industries
5. HDFC Bank
7. Hindalco Industries
8. Hindustan Unilever (HUL)
9. ICICI Bank
11. Larsen & Toubro (L&T)
12. Reliance Industries
13. State Bank of India
14. Tata Motors
15. Tata Power
16. Tata Steel
Since inception, Nifty 50 has given an annualized returns of 11% while having volatility of 25.4%. In previous 15 years, 10 years and 3 year period, the index has given returns of more than 11%. Volatility has reduced in the recent periods from 24% in 10 and 15 year periods to below 19%. It is important to compare the returns delivered by Nifty with its volatility. You can take notes from the information below:
In terms of calendar year return since 1996, Nifty 50 has given more than 50% return 4 times and more than 30% return in 7 calendar years. A correction greater than 20% in a year has happened only twice. Below is the year on year performance of Nifty 50 based on the calendar year.
Nifty 50 as on September 30, 2015 is trading at P/E of 22.2 and P/B of 3.2 which is lower than the high of 28.5 and 6.6 respectively observed since 1999. Average P/E and P/B of Nifty is 18.6 and 3.6 respectively.
ETFs Launched on Nifty 50 Index:
Domestic Presence – It is the most widely used ETF benchmark in Indian stock market with 11 out of 34 ETFs tracking the index as the underlying. ETFs on Nifty 50 accounts for 33% of total equity ETF AUM tracking Indian domestic stock markets.
Global Presence – Providers like iShares and db x-trackers have chosen Nifty 50 Index as a benchmark to launch ETFs on Indian stock market. Out of 24 India focused ETFs listed in International markets, 6 are based on Nifty 50 with total AUM of $1120 Million.
Derivatives on Nifty 50:
Domestic Presence – Futures and options contracts on Nifty 50 are widely traded in the Indian Stock Market on NSE. Options trading account for the most traded in the world. Since 2005, average notional value of Nifty futures and nifty options is ₹2.3 Tn and ₹12.5Tn respectively.
Across 20 years, there have been 80 inclusions in Nifty 50, averaging 4 per year.
Futures and options on Nifty 50 is currently traded on 3 international exchanges, namely
1. Singapore Stock Exchange
2. Osaka Stock Exchange
3. Chicago Mercantile Exchange
In Singapore stock exchange, no. of contracts traded have consistently increased from 7.5 Million in FY09 to 19.9 Million in FY15. Since April 2007, 13.5 Million contracts have traded on an average in a financial year.
Current characteristics of Nifty:
Nifty constituent stocks have an average full market capitalization of ₹56.9 Trillion and daily average turnover of ₹82 Billion. The top 10 stocks by weight contribute 53.6% and bottom 10 stocks contribute to about 5%. Currently, constituents of Nifty capture 66% of free float market capitalization and 47.4% of turnover of the entire equity market.
There are currently 6 stocks having a weight of over 5%. There are totally 32 stocks which contributes more than 1% by weight in Nifty 50 Index. As of 30.09.2015, Nifty 50 consists of stocks from 13 sectors. Financial services has the highest weightage of 31%.
Nifty 50 tracks the performance of a portfolio of 50 largest and most liquid Indian securities. The companies are filtered for liquidity on the basis of impact cost which 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. Nifty 50 methodology delivers the most replicable and reliable benchmark index for Indian stock market.
The index is re-balanced on a semi-annual basis. The cut-off date is January 31 and July 31 of each year. For semi-annual review of indices, average data for six months ending the cut-off data is considered. Four weeks prior notice is given to market from the date of change.
Tejas is the Co-Founder & CEO at FYERS, the youngest team to get NSE’s broker license. He has a specialization in finance and has over 10 years of work experience spanning across proprietary trading, risk management, and broking. Tejas & his team started FYERS, a technology-focused brokerage as a mission to transform the trading/investment landscape in India.