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What is NIFTY? Is it better than Sensex?

Created on 09 Mar 2023

Wraps up in 13 Min

Read by 5.8k people

Updated on 28 Mar 2023

Picture this: you're a curious investor trying to make sense of the ever-changing landscape of the Indian stock market. With so many companies and industries to consider, keeping track of it all can be tough. 

Say hello to Nifty - the barometer of India's stock market that tracks the top companies listed on the National Stock Exchange. But Nifty is not just a term; it's a fascinating journey of economic growth, industrial progress, and financial opportunities. So, fasten your seatbelts and get ready for a rollercoaster ride into the world of Nifty.

What is Nifty50?

The name "Nifty" is derived from a combination of "National Stock Exchange" and "fifty," reflecting its goal of showcasing the top 50 performing equity stocks traded on the platform.

Nifty is a stock market index in India that is introduced and managed by the National Stock Exchange (NSE). It is a benchmark index that tracks the performance of the top 50 blue-chip companies listed on the NSE across 12 different sectors of the Indian economy, providing investors with a comprehensive view of the Indian economy's performance. These sectors include information technology, financial services, entertainment and media, consumer goods, metals, telecommunications, pharmaceuticals, cement and its products, automobiles, pesticides and fertilizers, energy, and other services. 

By tracking the Nifty index, investors can gain insights into the performance of the top-performing companies in each sector, helping them make informed decisions about their investments.

Nifty provides a snapshot of the overall performance of India's stock market by reflecting the changes in the market capitalization of its constituent companies. As a result, Nifty is considered a reliable indicator of the market's direction and helps investors make informed investment decisions.

Nifty plays a crucial role in the Indian stock market as it represents a significant portion of the market capitalization of the NSE. In other words, the Nifty 50 companies collectively account for a notable portion of the total value of all companies listed on the NSE.

Moreover, Nifty is used as a benchmark by fund managers, traders, and investors to evaluate the performance of their portfolios. For example, if a mutual fund claims to have outperformed the market, it's usually measured against the returns generated by Nifty.

Nifty 50 Companies

Drumroll, please! Here are the top 10 companies that made it to the Nifty 50 index as of February 2023:

NO.

COMPANY NAME

STOCK SYMBOL

SECTOR

WEIGHTAGE (%)

1

Reliance Industries Ltd.

RELIANCE

Oil Gas & Consumable Fuels

10.41

2

HDFC Bank Ltd.

HDFCBANK

Financial Services

9.06

3

ICICI Bank Ltd.

ICICIBANK

Financial Services

7.44

4

Infosys Ltd.

INFY

Information Technology

7.2

5

Housing Development Finance Corporation Ltd.

HDFC

Financial Services

6.06

6

Tata Consultancy Services Ltd.

TCS

Information Technology

4.41

7

ITC Ltd.

ITC

Fast Moving Consumer Goods

3.98

10

Larsen & Toubro Ltd.

LT

Construction

3.29

8

Kotak Mahindra Bank Ltd.

KOTAKBANK

Financial Services

3.22

9

Axis Bank Ltd.

AXISBANK

Financial Services

3.02

Find the rest of the index and stay updated with it on Ticker by Finology. Keep a close eye on these companies, as they are likely to significantly impact the market's direction and provide investment opportunities.

Eligibility criteria for Nifty Index Listing

To be included in the Nifty index, a stock must meet stringent eligibility criteria:

  • The stock must have traded at an average impact cost of 0.50% or less for at least 90% of observations over the last six months for a basket size of  ₹100 million, indicating liquidity.
  • The stock must have a listing history of at least six months.
  • The stock must be traded in the F&O segment.
  • Companies that have completed an IPO will be eligible for inclusion if they meet the standard eligibility criteria for three months instead of six.
  • The NIFTY Index is reconstituted every six months, and the performance of a stock over this period determines its inclusion or elimination from the index.
  • Companies not meeting the eligibility criteria may be removed from the index, while new companies that meet the criteria may be added.
  • Companies are notified of any reconstitution changes four weeks in advance, and reconstitution may also occur due to corporate actions like mergers or spin-offs.
  • NIFTY also conducts quarterly screenings of companies to ensure adherence to portfolio concentration regulations for Index Funds and ETFs as per SEBI mandate.

What is Nifty used for?

NIFTY is a popular stock market index in India that investors, traders, analysts, and fund managers widely use to track the overall performance of the Indian stock market. The index comprises the top 50 companies listed on the National Stock Exchange (NSE) based on their market capitalization. It is reviewed and rebalanced periodically to reflect the current market conditions.

One of the main uses of NIFTY is as a benchmark for measuring the performance of the Indian stock market. By tracking the movement of the index, investors can get a sense of the overall health of the market and its direction. They can also use the index to compare the performance of individual stocks or their portfolios against the broader market.

NIFTY is also used as a tool for investment. Investors can use the index to gain exposure to the Indian stock market by investing in index funds or exchange-traded funds (ETFs) that track the NIFTY index's performance. This provides a convenient way for investors to diversify their portfolios across various companies and sectors.

Another important use of NIFTY is as a barometer of the Indian economy's health. As the index comprises the top 50 companies in India, it reflects the country's economic growth and development over time. Therefore, changes in the NIFTY index can be seen as indicators of the overall direction of the Indian economy.

Simply put, NIFTY is crucial in the Indian stock market ecosystem. It is an essential tool for market participants, providing a comprehensive snapshot of the Indian stock market's performance and facilitating investment decisions. By tracking the movement of the index, investors can gain insights into market trends, risks, and opportunities and make informed investment decisions.

How Nifty is Calculated?

Are you curious about how the Nifty 50 index is calculated? Well, it's not as simple as adding up the stock prices of the 50 companies and dividing by 50. The calculation methodology of Nifty 50 involves several steps, including 

1. Determining the free float market capitalization of each stock: Free float market capitalization refers to the total market value of a company's outstanding shares that are available for trading in the open market. It is calculated by multiplying the company's total number of outstanding shares by the current market price of each share and then subtracting the value of shares held by promoters, government, and other strategic investors. 

Market Capitalisation = Outstanding share x Stock’s current price

Free Flow Market Capitalisation = Market capitalization - shares held by promoters, government, and other strategic investors.

For example, if a company has 100 million outstanding shares and the current market price of each share is  ₹100, and promoters, government, and other strategic investors hold 30 million shares, then the free float market capitalization of the company would be  ₹7,000 crores (70% of  ₹10,000 crore, which is the total market capitalization of the company).

2. Determining the total free float market capitalization of all Nifty 50 stocks: This is simply the sum of the free float market capitalization of all the 50 stocks that make up the Nifty 50 index.

Free Float Market Capitalisation of Nifty 50=  Free Float Market Capitalisation of (Stock A + Stock B + …………+ Stock Z)

3. Determining the market capitalization of the index: This is the free float market capitalization of all Nifty 50 stocks divided by the index divisor. An index divisor is a number that is adjusted periodically to maintain continuity and avoid distortions due to corporate actions like stock splits, bonus issues, and rights issues.

Market Capitalisation of Index = Free Float Market Capitalisation of Nifty 50/Index Divisor

4. Determining the index value: This is the market capitalization of the index divided by the base value of the index (which was 1,000 when the index was launched in 1996).

Index Value = Market Capitalisation of Index/ Base Value of Index (1,000)

An example to illustrate the calculation methodology of Nifty 50:
Let's assume that the free float market capitalization of each of the 50 stocks in the Nifty 50 index is as follows:

Stocks

Value (in crores)

Stock A

₹10,000

Stock B

₹7,500

Stock C

₹5,000

.

.

.

.

₹…..

 ₹…..

 ₹…..

 ₹…..

Stock Y

₹1500

Stock Z

₹1,000

 

The total free-float market capitalization of all Nifty 50 stocks would be:
₹10,000 crores +  ₹7,500 crores +  ₹5,000 crores + ... +  ₹1,500 crores +  ₹1,000 crores =  ₹1,50,000 crore

Assuming that the index divisor is 3.456, the market capitalization of the index would be:
₹1,50,000 crore / 3.456 =  ₹43,390 crores

Finally, assuming that the base value of the index is 1,000, the index value would be:
₹43,390 crore / 1,000 = 43.39

Therefore, the current value of the Nifty 50 index would be 43.39, assuming the above values for free-float market capitalization and index divisor.

Different Types of NIFTY Indices: Sectorial Indices

In addition to the Nifty 50, the National Stock Exchange of India also calculates and publishes sectoral indices, which represent the performance of specific sectors of the economy. These indices are calculated using the same methodology as the Nifty 50 but with a narrower focus on a particular sector. For example, the Nifty Bank index tracks the performance of the banking sector, while the Nifty IT index tracks the performance of the information technology sector.

1. NIFTY BANK: This index tracks the performance of the banking sector, including banks and financial institutions.

2. NIFTY AUTO: This index tracks the performance of companies in the automotive sector, including manufacturers of passenger cars, commercial vehicles, and two-wheelers.

3. NIFTY FIN SERVICE: This index tracks the performance of companies in the financial services sector, including banks, insurance companies, and other financial institutions. 

4. NIFTY FMCG: This index tracks the performance of the fast-moving consumer goods sector, including companies that produce and sell packaged food and beverages, personal care products, and household items.

5. NIFTY IT: This index tracks the performance of the information technology sector, including software and hardware companies.

6. NIFTY MEDIA: This index tracks the performance of media and entertainment companies in India. This includes companies that produce films, television shows, music, and digital content.

7. NIFTY METAL: This index tracks the performance of the metal and mining sector, including companies that mine, refine, and produce metals like steel, aluminium, and copper.

8. NIFTY PHARMA: This index tracks the performance of the pharmaceutical sector, including companies that produce and sell drugs and medical equipment.

9. NIFTY PSU BANK: This index tracks the performance of public sector banks in India. Public sector banks are government-owned and important in providing banking services to the Indian population. This includes banks like the State Bank of India, Punjab National Bank, Bank of Baroda, and others.

10. NIFTY PVT BANK: This index tracks the performance of private sector banks in India. This includes banks like HDFC Bank, ICICI Bank, and Axis Bank, among others. Private sector banks have been growing rapidly in India in recent years, and this index provides investors with a way to track their performance.

11. NIFTY REALTY: Nifty Realty Index: This index tracks the real estate sector's performance, including companies that develop and sell commercial and residential properties.

12. NIFTY OIL and GAS: This index tracks the performance of companies in the oil and gas sector, including exploration and production companies, oil refining companies, and gas distribution companies. This includes companies like Reliance Industries, Oil and Natural Gas Corporation, and Indian Oil Corporation.

Sectoral indices are important in the Indian stock market because they provide investors with a way to track the performance of specific sectors of the economy. This information can be useful for investors who want to invest in a particular sector or who want to diversify their portfolio across multiple sectors.

For example, if the Nifty Bank index is performing well, it may indicate that the banking sector is healthy, which can be a positive sign for the broader economy. Similarly, if the Nifty Realty index is performing poorly, it may indicate that the real estate sector is struggling, which can affect the overall economy.

Historical Evolution of NIFTY

From its humble beginnings to becoming one of India’s most influential stock market indices in India, the NIFTY has undergone a fascinating evolution over the years. This evolution can be divided into several phases, each with its unique characteristics:

1. The inception phase (1995-2000): The NSE introduced the NIFTY 50 index on April 22, 1996, with a base value of 1,000 points. The index included 50 stocks from 22 sectors, and its composition was based on market capitalization and liquidity. During this phase, the index experienced high volatility due to the opening up of the Indian economy and the dot-com boom.

2. The growth phase (2001-2008): The NIFTY 50 index continued to grow during this phase, reaching its all-time high of 6,347 points on January 10, 2008. The Indian economy was growing rapidly, and the performance of it and the banking sectors drove the index.

3. The global financial crisis (2008-2009): The NIFTY 50 index was not immune to the global financial crisis that began in 2008. It fell to a low of 2524 points on October 27, 2008, losing more than 60% of its value from its peak. However, the index recovered quickly and ended the year with a gain of 75%.

4. The consolidation phase (2010-2013): The NIFTY 50 index was range-bound during this phase, moving in a narrow range of 4,500 to 6,200 points. The Indian economy was facing headwinds due to high inflation and slowing growth.

5. The Modi era (2014-2019): The NIFTY 50 index started a new growth phase with the election of Narendra Modi as the Prime Minister of India in 2014. The index rose by more than 40% in 2014 and continued to grow in the following years, reaching a new all-time high of 12,430 points on January 20, 2020.

6. The COVID-19 pandemic (2020-present): The NIFTY 50 index was not immune to the global pandemic, falling to a low of 7,610 points on March 23, 2020, due to the economic uncertainty caused by the pandemic. However, the index recovered quickly, reaching its pre-pandemic levels by November 2020. Since then, the index has performed well and touched a new all-time high of 18,887 points on December 01, 2022.

Major Milestones of Nifty

A thrilling journey through the historic moments that shaped the financial landscape of India as we explore the major milestones of NIFTY - 

Phase (Year)

Years

Major Milestones

1991 - 2000

1993-1994

  • NSE launched the equity and wholesale debt market segments.

  • Electronic or screen-based trading commenced.

1995-1996

  • NIFTY 50 Index was launched, and trading and settlement in dematerialized securities began.

2001 - 2010

2000-2001

  • NSE launched index options based on the NIFTY 50 index (formerly S&P CNX NIFTY) for trading, along with single stock futures and options on listed securities.

2001-2002

  • The exchange launched ETF listings.

2004-2005

  • NSE introduced NIFTY Bank index derivatives.

2007-2008

  • The exchange became the first in India to offer to trade in currency futures and introduced the Securities Lending and Borrowing Scheme (SLBS). NSE also launched the NOW platform for web-based trading.

2008-2009

  • NSE launched the Mutual Fund Service System (MFSS).

2011 - 2020

2010 - 2011

  • NSE expanded its trading offerings by introducing index futures and options contracts on global indices such as the S&P 500 and Dow Jones Industrial Average.

2011 - 2012

  • NSE started trading in index futures and options contracts on the FTSE 100 index. Additionally, they launched a platform called EMERGE, specifically designed for listing and trading securities for Small and Medium-sized Enterprises (SMEs).

2013 - 2014 

  • NSE launched the NMF-II platform for mutual funds

  • NBF II segment for interest rate futures was introduced

  • Trading on India VIX index futures was launched

  • Trading on NIFTY 50 on the Osaka Exchange commenced

2018 - 2019

  • NSE launched the Commodity Derivatives segment and goBidMobile app for government securities

  • Weekly options on NIFTY 50 were launched

  • E-voting for corporates was introduced

  • NSE derivatives access was given to US clients

  • NSE signed a Post-Trade Technology and Strategic Partnership Agreement with Nasdaq

  • An MoU was also signed with the London Stock Exchange Group

2019 - 2020

  • NSE EMERGE achieved a significant milestone with the listing of its 200th SME

  • NSE Commodities Segment received recognition from CBDT

  • NSE opened a Centre for Behavioral Science at IIMA

  • NSE launched Interest Rate Options on Government of India bonds

  • NSE Indices launched the Nifty BHARAT Bond Index Series

  • NSE declared the world's largest derivatives exchange in 2019 by WFE

2020 - 2030

 
  • In collaboration with the Indian Bullion and Jewellers Association (IBJA), NSE also announced plans to set up a Domestic Bullion Spot Exchange.

  • Finally, NSE Data, a subsidiary of NSE, launched a Fixed Income Analytics Platform (FixedIn) to help market participants analyze fixed-income securities more effectively.

How to invest in NIFTY?

You can invest in NIFTY in several ways:

1. Mutual Funds: One of the most popular ways to invest in Nifty is through mutual funds. Many mutual fund companies offer index funds that invest in Nifty. You can invest in these funds through lump-sum investments or systematic investment plans (SIPs).

2. Index funds: Another option is investing in index funds that track the Nifty. Index funds are passive investments that aim to replicate the performance of a particular index.

3. Futures and options: Investors can trade Nifty futures and options on the National Stock Exchange (NSE).

Benefits of Investing in NIFTY

Get ready to spice up your investment portfolio with Nifty 50 benefits:

1. Diversification: NIFTY 50 comprises 50 large-cap stocks from different sectors of the Indian economy. Investing in NIFTY can provide diversification benefits and reduce the overall risk of an investment portfolio.

2. Passive Investing: NIFTY 50 is a passive investment instrument that tracks the performance of the top 50 companies listed on the National Stock Exchange (NSE). This makes it an easy and convenient option for investors who prefer a hands-off investment approach.

3. Liquidity: NIFTY 50 is highly liquid and can be bought or sold easily on the stock exchange. This makes it a preferred investment option for traders seeking short-term gains.

4. Long-term Growth Potential: India is one of the fastest-growing economies in the world, and the country is expected to continue to grow in the coming years. By investing in NIFTY,  investors can tap into the long-term growth potential of the Indian economy.

5. Historical Performance: NIFTY 50 has delivered solid returns to investors over the years. Over the long term, the index has outperformed many other asset classes, including gold and fixed deposits.

What are the factors that affect Nifty?

Is Nifty 50 on your investment radar? Then you should closely monitor these crucial factors that can impact its performance. 

1. Macroeconomic Factors: Nifty 50 is closely linked to the country's overall economic growth. Factors such as GDP growth rate, inflation, interest rates, and fiscal policies can impact the index's performance.

2. Corporate Earnings: The Nifty 50 comprises 50 large-cap companies listed on the National Stock Exchange (NSE). The financial performance of these companies can have a significant impact on the index. Strong earnings growth can lead to a rise in the index, while weak earnings can lead to a decline.

3. Global Events: Nifty 50 is also influenced by global events such as geopolitical tensions, changes in commodity prices, and trade policies. For example, a sharp increase in crude oil prices can negatively impact companies in the energy sector and drag down the index.

4. Market Sentiments: Investors' sentiment towards the stock market can also impact the performance of Nifty 50. Positive sentiment can lead to a rise in the index, while negative sentiment can lead to a decline.

The Bottom Line

Overall, Nifty has proved to be a reliable and efficient barometer of India's stock market, reflecting the country's economic growth and market sentiment. As an investor, leveraging the power of Nifty can help you guide the complexities of the Indian stock market, mitigate risk, and achieve your investment goals. With its diversified portfolio of top-performing companies, Nifty offers a compelling investment option to help you unlock long-term growth potential.

So why not start exploring the potential of Nifty today and take your investment journey to the next level?

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Divyanshu Kumar

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Divyanshu did his post-graduation in Financial Economics, and that's when he realized that writing about finance interests him the most. He has been writing finance content for two years and considers himself a coherent and confident writer. As a Finance content writer, he reads a lot about the subject and makes sure he is up to date with the latest updates in the market. Besides that, he is passionate about fitness and works hard to maintain a healthy lifestyle.

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