Fisdom wins the Best Financial Services Partner Award - Know more ×

What is Nifty and How is Nifty Calculated?

  • Akshatha Sajumon
  • 04 Apr
  • 7 minutes

Investment in the stock market is viewed as a gamble by the majority of people. This is mainly due to a lack of investor awareness and also lack of knowledge of the investment products that offer good returns at a relatively lower risk. Informed investors and traders, however, can gain huge returns by careful research and analysis of the two national indices in India namely, Nifty and Sensex. 

What is Nifty?

Nifty 50 is the market index of the National Stock Exchange and is owned by India Index Services and Products (IISL). This index is formed of the top 50 equity stocks of those companies that are listed in the country in terms of liquidity and market capitalization. These companies are from various sectors in India like pharmaceuticals, consumer goods, financial services, energy, telecommunications, cement, information technology, automobiles, and more. Nifty 50 is used for various purposes like benchmarking fund portfolios, index-based derivatives, and index funds.

Eligibility for listing in Nifty

Investors have the benefit of choosing top stocks for investment and trading to maximize their returns. Securities listed on Nifty are among the top-rated companies hence, there are strict eligibility criteria for the companies to be listed on Nifty. The latest performance of these companies is reviewed for the period of the last 6 months to be eliminated or added to the list of companies traded on Nifty. The specific eligibility criteria required by the companies to be listed on Nifty are discussed below.

  • The first and foremost condition is that the company has to be an Indian Company and registered on the National Stock exchange
  • The stock of such a company should be highly liquid. To measure the liquidity of the stock of any company, the average impact cost is considered. This impact cost refers to the trading price of single security in relation to the index’s weight to the company’s market capitalization.

The eligibility criterion in this regard requires the company’s impact cost to be less than or equal to 0.50% for six months while 90% of the observations made on a portfolio of Rs.10 crores.

  • The trading frequency of the company is also considered and such frequency has to be 100%
  • Another important factor is the free-floating average market capitalization. It has to be 1.5 times higher than the smallest company on the index.
  • Nifty 50 can also include shares of the company that has Differential Voting Rights (DVR) as eligible companies on the index.

Any changes in the structure of the listed companies (mergers, demergers, mandatory delisting, suspensions, etc.) also prompt a revision in the Nifty 50. Nifty carries a thorough quarterly review of the companies listed on the index to ensure that they comply with all the regulations set by SEBI and other mandatory norms required in this regard.

How is Nifty Calculated?

The calculation of Nifty 50 indices is based on the float-adjusted and market capitalization method. The level index represents the aggregate market value of the stocks that are present in the index for a specific duration. The base duration for the Nifty Index is 3rd November 1995. The base value of stocks is 1000. The base capital is Rs. 2.06 trillion.

The formula for calculating the index value is 

Market capitalization = Price * Equity Capital

Free Float Market Capitalization = Price * Equity Capital * Investable Weight Factor

Index value = Current market value / (1000 * Base market capital)

In the above-mentioned formula, the IWF (Investible Weight Factor) is a factor that is used to determine the number of shares that are available for trading in the market. The value of stocks changes daily and hence, the calculation of the index is done in real-time.

The above formula also incorporates the changes in the corporate world. These changes can be stock splits, rights issues, etc. Nifty conducts regular checks to maintain the index to ensure its stability and efficient workings.

Major milestones of Nifty

Period Milestones 
1996-2000
  • Start of trading in dematerialized securities on NSE exchange
  • Launch of index futures based on the index of NIFTY 50
  • Index futures were listed on the Singapore Exchange
  • Start of internet trading
2001-2010
  • Introduction of Index options (based on the NIFTY stock market index)
  • Introduction of single stock F&Os or futures and options on the index of listed securities
  • Introduction of ETF listings
  • Introduction of NIFTY Bank index derivative
2010-2020
  • Start of index futures and options trading on global indices, i.e. Dow and Jones Industrial Average and S&P 500
  • Start of index F&O contracts on the index of FTSE 100
  • Start of NIFTY 50 trading on the Osaka Exchange
  • Introduction of trading of NIFTY 50 index futures on TAIFEX

What are the companies in Nifty 50?

Given below is the list of companies listed on Nifty as of January 2021.

Reliance Industries Ltd. State Bank of India Shree Cement Ltd.
HDFC Bank Ltd. Nestle India Ltd. Eicher Motors Ltd.
Infosys Ltd. Mahindra & Mahindra Ltd. Oil & Natural Gas Corporation Ltd.
HDFC Ltd. Sun Pharmaceutical Industries Ltd. Coal India Ltd.
Tata Consultancy Services Ltd. Dr. Reddy’s Laboratories Ltd. Tata Steel Ltd.
ICICI Bank Ltd. UltraTech Cement Ltd. UPL Ltd.
Kotak Mahindra Bank Ltd. Power Grid Corporation of India Ltd. Grasim Industries Ltd.
Hindustan Unilever Ltd. HDFC Life Hindalco Industries Ltd.
ITC Ltd. Britannia Industries Ltd. Adani Port and Special Economic Zone
Bharti Airtel Ltd. Titan Company Ltd. JSW Steel Ltd.
Larsen & Toubro Ltd. Tech Mahindra Ltd. Indian Oil Corporation Ltd.
AXIS Bank Ltd. NTPC Ltd. Tata Motors Ltd.
Bajaj Finance Ltd. Wipro Ltd. GAIL (India) Ltd.
Maruti Suzuki India Ltd. Bajaj Auto Ltd. Bharti Infratel Ltd.
Asian Paints Ltd. Bajaj Finserv Ltd. Zee Entertainment Enterprises Ltd.
HCL Technologies Ltd. Cipla Ltd. Hero MotoCorp Ltd.
Bharat Petroleum Corp. Ltd. IndusInd Bank Ltd

Benefits of investing in Nifty 50

Investment in Nifty can be done through Nifty index funds, ETFs, Nifty futures. Investment in these products has many benefits that the investors can enjoy. Some of such benefits are mentioned below.

  • Lower risk

Investment in index funds or ETFs has lower risk as compared to other investment products like individual stocks or mutual funds. These funds simply track the performance of Nifty and replicate it as closely as possible. Hence, the risk factor is quite low.

  • Better returns on long term

While investing in the market is subject to huge volatility, Nifty will eventually always grow in the long run. Hence, investment in Nifty would to provide the investor with better returns in the long term.

  • Reduced expense ratio

Nifty index funds or ETFs are passively managed funds. Hence, the role of fund managers is not as active as in the case of mutual funds. This results in a lower expense ratio for the investors.

  • Free from fund manager bias

Index funds or ETFs, as mentioned above, simply track the underlying index and try to match its performance with minimal tracking errors. Hence, being passively managed funds, the fund managers have no bias in picking securities for the fund.

  • Diversified portfolio

Index funds and ETFs provide a diversified portfolio to the investors in every unit of the fund. Investors can access bit only different stocks but also different sectors through investment in index funds and ETFs.

Conclusion

Nifty is one of the two benchmark indexes in India where investors can gain better returns in long term through lower costs. It is considered to be a safer and productive investment option for novice investors as well as seasoned investors.


Frequently Asked Questions

Can investment in Nifty be considered to be safe?
Yes. Investment in Nifty through Index funds or ETFs is considered to be a safer investment choice as compared to many other investment products like mutual funds.

How much is the free-float market capitalization of stocks represented on Nifty?
Nifty represents 65% of the free-float market capitalization of stocks listed on NSE.

What is the base period for Nifty?
The base period for Nifty is 3rd November 1992.

What is the base capital for Nifty?
The base capital for Nifty is Rs.2.06 Trillion.

What is the trading frequency required by a company to be listed on NIfty?
The companies to have a trading frequency of 100% in the past 6 months to be listed on NIfty.

 

Related Articles

author image

Akshatha Sajumon

Foundation Program in stock market for biginners

Early bird offer till 30th Sept 2022 ₹3,999 ₹2,999

Days
Hours
Minutes
Seconds