How Is The Nifty Index Calculated? Which Are Among the Most Prominent Stocks in Nifty?
How Is The Nifty Index Calculated? An Overview
When we use the term Indian stock market, we are all talking about either the Nifty or Sensex. Nifty and Sensex consist of India’s largest and finest companies with good fundamentals. These companies have a huge role in the growth of the economy of the country. The market index acts as a barometer for gauging the long-term health of the Indian economy.
Many times you have heard the news anchor saying "Nifty has gained 50 points today or Nifty is 100 points down today." so, what does it mean? In this article, we are going to learn about what Nifty is, the Nifty calculation formula, the process of Nifty calculation, and how Nifty 50 is calculated.
What Is Nifty?
Before understanding the Nifty, it is important to understand the market index. A market index consists of stocks that are created by the stock exchanges. The index was introduced in 1992. The leading two stock indices in the stock market: Nifty and Sensex
The index of NSE (National Stock Exchange) is Nifty and the index of BSE (Bombay stock exchange) is Sensex.
Nifty has market cap indices such as Nifty small cap, nifty mid-cap, and nifty large-cap as well as sectoral indices such as Nifty IT, Nifty bank, and Nifty pharma. Nifty has a well-defined and transparent methodology to select companies. It is selected on 4 aspects: The universe of companies, the basic construct, the liquidity, and the rebalancing and reconstruction rules.
Nifty 50 consists of the top 50 companies belonging to different sectors. The term Nifty 50 is a short form of National stock exchange 50 but now it has been shortened to Nifty 50. The top 50 companies that are listed on the Nifty 50 should be listed on the NSE. Also, the nifty carries representation from 13 different sectors including Financial Services, IT, Oil and gas, Consumer goods, Automobile, Metals, Pharma, Construction, Cement & cement production, Telecom, power, services, and fertilizer & pesticides. These companies are market leaders in their sector and have large market capitalization. It represents the overall performance of the share market and is used by various investors including retail investors, domestic investors, institutional investors, and foreign investors to gauge the market performance.
Eligibility Criteria to be the Constituents of Nifty 50
- The company must be listed on the stock exchange.
- The company should be available for trading in the Future & Options segment on NSE.
- The selected companies have to be in the top 50 companies in terms of their free-float market capitalization. Free float means shares that are publicly traded.
- The company should have high liquidity. Liquidity means that the trading volume of the stock should be always high.
- On a semi-annual basis, the rebalancing exercise of nIfty is done which determines which stocks stay within the Nifty, which new ones come in, and which of the existing companies move out of the Nifty. This process happens in June and December of every year.
The importance of nifty’s in the financial markets allows for a lot of innovation around it. For instance, mutual fund managers use Nifty as a benchmark. For example, the Nifty 50 index has given a 15% return in the last year but your mutual fund has given a 12% return. In this case, you are at a loss of 3% and the index is performing better than a mutual fund. On the other hand, if the mutual fund has given an 18% return in the last year, here you have beaten the market.
How to Invest in Nifty 50?
If you want to invest in a market index like Nifty 50, then you can invest in index mutual funds or ETFs that track and invest in the stocks that are part of Nifty 50. This is the best way to gain similar returns as nifty 50. Moreover, index mutual funds charge a less expense ratio than other mutual funds. So, It is best suitable for novice investors. Also, you can create a portfolio where you can include all the Nifty 50 stocks with the same weightage. However, this can be time taking and needs frequent rebalancing.
- Investing in a Nifty index fund can give you good returns in the long run. Make sure to stay disciplined and not get influenced by short-term volatility in the market.
- The fund manager doesn't need to research stocks or balance them periodically. All they have to do is track and invest directly in stocks that are constituents of the Nifty 50.
- Nifty 50 index funds have comparatively lower expense ratios than other mutual funds.
- The performance of the index mutual fund is based on the Nifty 50 index.
How Nifty Index Is Calculated?
The method that is used to gauge the nifty index is the Float-adjusted and Market Capitalization method. This method represents the overall market value of all the Nifty 50 stocks relative to the base period. The base year taken for the calculation of nifty is November 3, 1995.
- The first step for the Nifty 50 calculation is to calculate the market capitalization of all the nifty 50 companies. It reflects the overall value of all the shares of a company held by various traders in the market. Market capitalization is calculated by multiplying the number of shares outstanding by their current market price.
- The next step is to multiply the market capitalization of all the nifty 50 companies with the (IWF) investable weight factor. The Investable weight factor helps to find the shares available for trading. However, it does not include the shares held by promoters of the company, employees, and the government.
- Then the weighted free float market cap is calculated by multiplying market cap with IWF and weight.
- The last step is to calculate the index value by dividing the current market value by the base market capital and then the result is multiplied with 1000. The base year taken to calculate the index value is 1995.
Top Companies in Nifty 50
|Company’s name||Sector||Market cap||ROE||P/E ratio|
|Yes Bank||Banking||Rs. 42,220 Cr.||3.18%||1.25|
|Indiabulls Housing Finance Ltd.||Financial services||Rs. 5,598 Cr.||7.18%||4.72|
|Rs. 1,51,860 Cr.||-22.93%||NA|
|Eichers Motors||Automobile||Rs. 92,453 Cr.||13.94%||39.66|
|IndusInd Bank||Banking||Rs. 91,053 Cr.||10.50%||14.99|
|SBI||Banking and Financial Services||Rs. 5,42,304 Cr.||12.17%||13.17|
|Bajaj Auto||Automobile||Rs. 1,02,087 Cr.||21.58%||17.81|
|Asian Paints||Consumer goods||Rs. 2,97,317 Cr.||22.77%||81.13|
|Tata Steel||Metals||Rs. 1,28,810 Cr.||42.56%||4.49|
|Coal India Ltd||Energy and mining||Rs. 1,42,113 Cr.||43.58%||5.44|
|Reliance Industries||Oil and Refinery||Rs. 16,80,186 Cr.||8.21%||25.99|
|TCS||IT Services & Consultancy||Rs. 12,10,524 Cr.||43.66%||30.73|
|HDFC Bank||Private Banks||Rs. 8,91,461 Cr.||16.65%||21.37|
|Infosys||IT services & Technology||Rs. 6,64,158 Cr.||29.15%||29.07|
|ICICI Bank||Private Bank||Rs. 6,46,698 Cr.||14.79%||22.17|
|HDFC||Home Finance||Rs. 4,79,850 Cr.||13.43%||19.95|
|Bharti Airtel||Telecommunications||Rs. 4,87,074 Cr.||6.78%||72.64|
|ITC||FMCG||Rs. 4,21,703 Cr.||24.82%||24.31|
|Hindustan Unilever Ltd||FMCG||Rs. 5,89,125 Cr.||18.35%||61.05|
(Data as of 25th November 2022)
Disclaimer: The securities quoted are exemplary and not recommendatory. Past performance is not indicative of future returns
To conclude, now you know how to calculate the nifty index, how to invest in nifty 50, and the top companies of nifty 50. You can invest in the Nifty 50 index fund to earn good returns in the long run. However, The value of the Nifty 50 index or any index changes when there is any change in the value of the stocks listed in the index. So, you need to consider the market condition, macroeconomic factors, and inflation rate before considering investing in Nifty 50. Also, make sure to analyze your investment objective, risk appetite, and timeline of your investment before investing in any index fund or financial instrument.
This is not an investment advisory. The blog is for information purposes only. Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, goal, time frame, risk and reward balance, and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs. The performance and returns of any investment portfolio can neither be predicted nor guaranteed.
How Nifty 50 is calculated?
The nifty 50-weighting method is used for nifty calculation.
What is nifty calculation formula?
Nifty calculation formula to calculate the Nifty index:
- Market capitalization is calculated by multiplying equity capital with the share price.
- Free float market capitalization is calculated by multiplying share price with equity capital and investable weight factor (IWF).
- The index value is calculated by multiplying 1000 by the base market capital and then dividing the results by the current market value.
Who owns Nifty?
IISL (Index service & Products Limited) owns and manages Nifty.