When it comes to investing in the Indian securities market, most retail and institutional investors look closely at the performance of the Nifty indices. The Nifty indices have become synonymous with the overall movement and sentiment of the Indian stock markets. But what exactly are the Nifty indices and how are they constructed? This article aims to provide a detailed understanding of the most tracked Nifty indices.
Nifty 50 – The flagship index
The Nifty 50 is the flagship index of the National Stock Exchange (NSE). It represents the weighted average market capitalisation of the top 50 companies listed on the NSE. The Nifty 50 covers 13 sectors of the Indian economy and offers the most comprehensive representation of India’s stock universe.
The Nifty 50 is computed using a free float market capitalisation weighted methodology, wherein the weight of each constituent is capped at a maximum of 8%. This capping ensures that no single stock dominates the index. The index has a base date of April 1995 and a base value of 1000. The Nifty 50 is widely tracked by investors as the benchmark for overall market performance. The composition of the index is reviewed every six months to ensure it reflects the changing sectoral weights in the economy.
Split indices – Sectoral performances
While the Nifty 50 provides a market-wide picture, the NSE also offers a range of split indices that track the performance of various sectors independently. Split indices allow gauging the sectoral trends in the economy and enable comparison of sectoral performances. Some key split indices are:
Nifty Bank Index
Consists of 12 leading banking and financial services companies listed on the NSE. Top constituents are HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Axis Bank and SBI. This index represents the banking sector, which is a heavyweight in the Nifty 50 as well.
Nifty Financial Services Index
Covers banks, housing finance companies, insurance companies, rating agencies and other financial services providers. Reflects the performance of the broad financial services space.
Nifty FMCG Index
Consists of leading fast moving consumer goods (FMCG) companies like ITC, HUL, Britannia Industries, Nestle India and Dabur India. The index tracks the FMCG sector which produces essential items of daily consumption.
Nifty IT Index
Comprises top technology and IT services companies listed on the NSE. Key constituents are Infosys, TCS, HCL Technologies, Wipro and Tech Mahindra. The index reflects the performance of India’s globally competitive IT sector.
Nifty Pharma Index
Made up of leading pharma companies in India including Sun Pharma, Dr Reddy’s Labs, Cipla, Divi’s Labs and Lupin. This sector has seen increased investor interest in recent times.
Nifty Auto Index
Covers major automobile and auto component manufacturers in India. Maruti Suzuki, Bajaj Auto, Hero MotoCorp, Eicher Motors, M&M and Bosch are some of the constituents. The auto sector performance has a direct bearing on manufacturing activity.
Apart from the above indices, the NSE also has split indices for sectors like media, realty, commodities, energy and others. The sectoral indices provide insights into performances of key industries and enable better investment decisions. They are useful tools for diversifying across sectors and generating returns.
Market-cap based indices
In addition to the flagship Nifty 50 and sectoral indices, NSE also offers various market capitalisation-based indices that are much broader in scope and coverage. These indices reflect the performance of a wider cross section of listed companies based on their full market capitalisation. The market-cap indices are below.
Nifty 500 – Covers the top 500 companies listed on NSE based on full market capitalisation. This index represents about 90% of the total market capitalisation and hence provides the most exhaustive coverage.
Nifty Midcap 50 – Tracks the next 50 companies after the Nifty 50, also based on market capitalisation. Reflects the performance of established mid-sized companies across sectors.
Nifty Midcap 100 – As the name suggests, covers the next 100 companies after the Nifty 50 and Midcap 50. Offers enhanced coverage of the midcap segment.
Nifty MidSmallcap 400 – Consists of the next 400 companies after the above indices, providing a snapshot of the smallcap and lower midcap space.
Nifty Smallcap 250 – Covers 250 smaller companies at the lower end of market capitalisation. Gives representation to emerging smallcaps.
Nifty Microcap 150 – Tracks the performance of 150 microcap companies listed on the NSE. Focuses on the smallest companies based on market cap.
Strategy indices
NSE also publishes various strategy indices that are based on specific themes or investment strategies. These indices apply pre-determined screens and filters to select constituent stocks. Some popular strategy indices include –
Nifty Dividend Opportunities 50 – Aims to capture dividend yield by including companies with high dividend payout track record.
Nifty200 Quality 30 – Focuses on quality by tracking large cap companies with strong balance sheets and earnings.
Nifty100 Alpha 50 – Consists of stocks with potential to generate alpha or outperformance compared to other indices.
Nifty200 Momentum 30 – Aims to capture momentum by tracking stocks with high price momentum.
Nifty Alpha Low-Volatility 30 – Blends alpha and low volatility themes to select less volatile stocks with potential for alpha generation.
Nifty200 Enhanced ESG – Applies ESG (environmental, social and governance) filters to select responsible stocks from top 200 companies.
Factors driving index performances
While tracking the headline indices is useful, it is also important to understand the key factors impacting their performance at any point.
- Macroeconomic environment and outlook – The state of the economy and expectations on growth, inflation, fiscal deficit, current account deficit etc. have a fundamental influence on market direction.
- Global cues – Equity markets worldwide are interconnected. So global trends, foreign capital flows and developments like crude prices, forex rates and US interest rates impact India’s indices.
- Corporate earnings trajectory – The actual results and guidance of index heavyweights and important sectors eventually drive market sentiments.
- Liquidity conditions – Abundant or tight liquidity impacts the ease of financing, trading activity and risk appetites of investors.
- Market fundamentals – Valuations, earnings momentum, institutional activity and technical factors also drive index performances from time to time.
Equity indices are driven by a host of inter-connected factors. Understanding these dynamics can help gain insights on market direction and also select appropriate stocks. The Nifty family of indices, with representation across themes, sectors and categories, offers the right tools for investors to track overall market progress and identify investment opportunities.
