An index is a method to track the performance of a group of assets in a standardised way. They help investors understand the movement of a particular basket consisting of similar types of stocks. This allows them to allocate money in a specific stock in that basket or in the basket itself after diligently comparing it to the other types of baskets.
Classification of stocks, to group them, is done based on a myriad of factors; the most commonly used factors include market capitalisation, sector/ industry, stock exchange, etc.
Sensex and NIFTY are the two primary market indices in India. The Bombay Stock Exchange (BSE) created Sensex in 1986, and the National Stock Exchange started NIFTY in 2001. NSE and BSE are the two stock exchanges facilitating the exchange of securities in India.
NIFTY 50, the benchmark index of NSE, consists of the top 50 equity stocks traded in the stock exchange. These stocks spread across 12 sectors of the Indian economy, including- information technology, consumer goods, entertainment and media, financial services, metals, pharmaceuticals, telecommunications, cement and its products, automobiles, pesticides and fertilisers, energy, and many more.
In contrast to NIFTY 50, Sensex, the benchmark index of BSE consists of the top 30 blue-chip stocks representing large, well-established, and financially sound companies across key sectors.
"Free-float Market Capitalization" methodology is used to calculate NIFTY and SENSEX indices. As per this methodology, the index level at any point of time reflects the Free-float market value of 30 and 50 component stocks relative to a base period.
As per this methodology, the index level at any point of time reflects the Free-float market value of 30 component stocks relative to a base period. The company’s market capitalisation is determined by multiplying its stock price by the number of shares issued by the company.
This market capitalisation is further multiplied by the free-float factor to determine the free-float market capitalisation that excludes shares held by insiders. It generally excludes promoters' holding, government holding, strategic holding, and other locked-in shares that will not come to the market for trading in the ordinary course.
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Apart from NIFTY 50, these are the following NIFTY indices available to investors:
Types of NIFTY indices
These indices consist of the large, liquid stocks listed on the NSE. They serve as a benchmark for measuring the performance of the stocks or portfolios such as mutual fund investments and are the most referred to indices by all types of investors.
The most common broad market indices are NIFTY 50- composed of the 50 largest companies in India, NIFTY NEXT-50- composed of the next 50 largest companies in India, NIFTY 100- composed of the 100 largest companies in India, NIFTY MIDCAP-50- composed of the 50 largest midcap companies in India, NIFTY 500- composed of the largest 500 companies in India, etc.
Sectoral Indices give summaries and benchmarking data of specific sectors or industries. It allows investors to track a stock against particular sectors. The 15 sectoral indices provided by NIFTY are NIFTY Auto Index, NIFTY Bank Index, NIFTY Financial Services Index, NIFTY Financial Services 25/50 Index, NIFTY FMCG Index, NIFTY Healthcare Index, NIFTY IT index, NIFTY Media Index, NIFTY Metal Index, NIFTY Pharma Index, NIFTY Private Bank Index, NIFTY PSU Bank Index, NIFTY Realty Index, NIFTY Consumer Durables Index, NIFTY Oil and Gas Index.
Usually, when buying or selling a stock in a particular sector, the sectoral index of that sector is analysed.
Thematic Indexes replicate the performance of different broad investment themes. Thematic investing follows specific social, economic, or other themes that are popular in society.
Thematic Indices based on NSE include NIFTY Commodities Index, NIFTY CPSE (Central Public Sector Enterprises) Index, NIFTY Energy Index, NIFTY Infrastructure Index, NIFTY PSE (Public Sector Enterprises) Index, etc., indices based on the biggest conglomerates operating in India, including NIFTY Tata Group, NIFTY Mahindra Group, etc., religious-laws based index- NIFTY Shariah Index, etc.
Strategy indices were introduced to provide a single value for the overall performance of several companies. They do so by using various quantitative models or investment strategies specific to a particular index.
Types of strategy indices provided by NIFTY includes NIFTY100 Equal Weight Index- comprising of the NIFTY 100 stocks but with equal weightage, NIFTY100 Low Volatility 30 Index- comprising of the 30 least volatile stocks of the NIFTY 100 stocks, NIFTY Alpha 50 Index- comprising of 50 stocks with high alpha in the past year, NIFTY Growth Sectors 15 Index- comprising of sectors based on P/E (Price/Earnings) values and stocks based on EPS (Earnings Per Share) values, NIFTY50 Value 20 Index- comprising of 20 value companies out of NIFTY 50 companies, NIFTY High Beta 50 Index- comprising of 50 high beta stocks in the last year, etc.
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Apart from the equity indices provided by NIFTY, which track the various stocks listed on the NSE, there are fixed income indices provided by NIFTY, which follow the performance of different fixed income securities, particularly bonds.
Therefore, they are used to analyse bond portfolios just as equity indices are used to analyse equity portfolios.
The G-Sec Indices or government security indices measure the performance of the most liquid Government of India (GoI) bonds. These indices are spread across six different categories based on the maturity period of the underlying bonds. The durations range from Ultra Short, Low, Short, Medium, Medium to Long to Long. Learn more about types of bonds in finance.
SDL or State Development Loans’ Indices analyse the loans financed by states by issuing bonds. NIFTY provides only 1 SDL index- NIFTY 10 Year SDL Index, which measures the performance of a portfolio of State Development Loans (SDLs) with residual maturity of about ten years; it includes bonds issued by 14 states in India.
Corporate bonds are as important a bond portfolio component as government bonds. Based on the ratings of the corporate bonds, NIFTY provides NIFTY AAA Corporate Bond Indices, NIFTY AA+ Corporate Bond Indices and so on.
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Each of these indices is further classified based on their duration from short to long periods, as was the case in G-Sec Indices. Apart from this, NIFTY also provides the NIFTY Banking and PSU Bond Indices under the corporate bond indices category.
Money market indices track the performance of money market instruments which primarily include commercial papers, certificate of deposits and treasury bills. NIFTY provides Certificate of Deposits Indices, Commercial Paper Indices, T-Bills Index Series and NIFTY 1D Rate Index as part of money market indices.
As suggested by the name, target maturity indices or defined-maturity indices track the performance of the bonds that have the same maturity date.
For example, NIFTY CPSE Bond Plus SDL Sep 2024 50:50 Index measures the performance of a portfolio of AAA-rated bonds issued by government-owned entities & SDLs maturing between October 01, 2023, to September 30, 2024.
NIFTY Fixed Income Aggregate Indices consist of 13 indices that measure specific debt portfolios’ overall performance. NIFTY Liquid, NIFTY Money Market, NIFTY Short Duration, NIFTY Composite, NIFTY Corporate, etc. indices are included in the fixed income aggregate indices, which are much broader as compared to the other type of fixed income indices.
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The National Stock Exchange (NSE) is an essential exchange that facilitates the buying and selling of various securities and provides unbiased data to investors all over India and abroad. NSE uses NIFTY to give beneficial information, which is eventually used for trading and investing decisions.
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Apart from the supplementary assistance provided by indices in stock selection, indices are traded independently by using various index funds and prove to be outperforming and accessible investment opportunities even for investors with not much stock analytical knowledge.
Every stock market participant follows the NIFTY 50 index. It is the first metric that comes to mind of any investor in India. NIFTY, or NSE, however, provides a myriad of other indices as well, which can be and are used by investors and traders to make decisions regarding their exposure to the Indian markets.
This blog looked at the various NIFTY indices broadly divided into the two categories of equity and fixed income indices, based on the equity and fixed income classification of assets in general and discussed their various niche classifications.
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