By Mayur Shah
NIFTY 50 Index is often used as one of the economic indicators for the Indian Market to understand the strength of the economy. Also Investment managers and the Investor community look at some of the ratios like Market Cap to GDP. India being now the 5th largest economy in the world, is definitely showing that. We are bucking the trend in terms of growth compared to large economies of the world. The question really comes whether NIFTY 50 represents the overall economic strength of India. NIFTY 50 index covers top 50 companies by market cap to reflect overall market conditions. NIFTY 50 Index is computed using free float market capitalization method. Here there is a challenge, the limited company 50 Stock along with Free Float Market Cap method leading to Index getting tilted in favor of a couple of sectors with higher allocation in comparison to these sectors actually contributing to the GDP.
|Sectors||NIFTY 50||Top 500 (Full Market Cap)||India’s GDP|
|Banking Finance & Insurance||37.0%||23.6%||~ 10%|
|Information Technology||14.2%||11.0%||~ 9.3%|
While in NIFTY 50 Index these two sectors cover up for 50 per cent of the weightage. Whereas if we remove free float and consider the top 500 companies by market cap the weightage drops down to 34 per cent and when we look at India’s GDP their share is approximately 20 per cent. Although deviation in Information Technology is very low, deviation in financial services is quite high. Although Banking and financial being an important source of credit for the economy, such higher weightage in NIFTY 50 Index is adding to the volatility of the index. There are many sectors and new age economy sectors which are not part of the index but are showing strong uptrend which might take time to enter this Index. Lots of opportunities are present for good investment outside NIFTY 50. The paradox here is the majority of Investors invest in companies which are not part of NIFTY 50 but make decisions of Investment/Disinvestment looking at NIFTY 50 Index. The movement in NIFTY 50 impacts the sentiment of the market which in turn affects the liquidity scenario.
However in the recent past we have seen many instances where the broader markets are showing deviation against the trend of NIFTY 50. Maturity level in the markets have started to increase. NIFTY 500 or BSE 500 can be better indicators to gauge the market movement however they too follow free float market capitalization method. For long term investors the key to success and make money is to have conviction on the companies you have invested in, keep a track on valuation, events impacting the earnings outlook, exit companies not delivering growth numbers over medium term as per your expectation and maintain a well-diversified portfolio by keeping weightage in checks. This is what we do to manage investments of our clients by being long term yet active management to generate alpha returns.
(Mayur Shah is the PMS Fund Manager at Anand Rathi Advisors. The views expressed are the author’s own and do not reflect the official position or policy of FinancialExpress.com.)