Know your Index ‘NIFTY’

Things to Know about your Nifty

Few years back when the concept of KYC (Know Your Clients) came in the markets, it was unique. However, slowly this has been well accepted and expanded. The KYC concept not only covers all the parts of financial industry but also the depth has increased. It not only covers the demographic details of the client but also the financial details. Net-net before any financial institution provides service to an individual or institution it is well aware about the client.

That’s what financial world is all about. Understanding the details of everything. The same applies to the instrument we are trading. Interestingly when it comes to stocks, we try to understand a lot about it. We analyze it’s quantitative and qualitative factors before reaching a decision. But when it comes to indices that part is restricted to quantitative analysis. This analysis is also quite restrictive in nature. Each and every one of us would have traded Nifty in some form or the other atleast. Rather there are lot of participants who simply trade Nifty only. The whole sentiment around stock market revolve around Nifty levels. Clearly, with such huge importance, no wonder that it is one of the most traded instrument in volume terms globally. Nifty derivatives are used for every aspect of trading; directional, hedging, arbitrage, structured products, benchmarking and so on. It’s popularity lead to emergence of this contract for trading on SGX, where it is doing really well.

But what about Nifty internals? As one trades Nifty it is important to understand the dynamics and change in them. That changes the way Nifty moves and clearly becomes an important part of our trading strategy. So, let’s look at it through a microscope lens.

Nifty was launched in 1990s and since then has been the flagship index of NSE and India. It is a composition of top 50 stocks in terms of market capitalization. Over last few years, it has moved market capitalization to free float market capitalization. It has been a very good indicator of the economic activity in the economy, more importantly it gives a clear view as to which sectors are leading in a given scenario. For instance, in early 2000 the index had lot of IT and communication companies, in 2007 it had lot of infra and real estate companies and now it has many BFSI companies. So, it has been the barometer of our economy.

In terms of market capitalization, it represents nearly 58% of the overall market capitalization and ~67% of the free float market capitalization. So, it covers a large part of the overall market. The index has generated 13% CAGR (without dividends) since inception. Over last 5, 10 and 15-year period it has generated a CAGR (without dividends) of 11%, 13% and 12% respectively.

Some, interesting changes over last few years has brought in some difficulty in trading Nifty, which is amplified in last few months. The share of BFSI has moved up from 27% to 39% over past 5 years. This has made the index extremely lopsided. Also, the weight of top 10 stocks has moved up from 54% historically to 60% and top 5 stocks are now 40% of the total index as compared to 36% historically. This has made the index moves extremely polarized. This largely due to risk aversion, so more and more money is finding way in top quality stocks. Also, the advent and growth of passive funds (index funds and ETFs) over last few years adds to this scenario.

Net – net the index has evolved to represent the economic health and situation of the market. With India moving towards a broader based economy one should now start looking at other indices like Nifty Junior or Nifty 100 and Nifty 200 as well.

If you would like to know more, kindly click here: https://bit.ly/2Ub9sS5

Happy Trading.

Cheers!!!