Nifty 50 Index Evolution Over a Decade
(A new blog post is available here with an update of the information as of 31Mar2022)
Stock indices evolve. In the process, they change their complexion. This article explores the movement of Nifty 50 Index in the past decade--how the stock and sector leadership changed over the years.
Data pertaining to top ten stocks and sectors are presented for three years, namely, 2011, 2016 and 2021. All data are as at the end of 31st of December of the particular year.
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Related Blog:
NSE Indices Comparison - compare Nifty 50, Nifty Next 50, Nifty 100 and Nifty 500
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The weights of the stocks and sectors are index weights (based on free float method) in Nifty 50. It may be recalled that NSE Limited shifted Nifty 50 computation from full market capitalisation to free float market capitalisation method effective 26Jun2009.
Incidentally, BSE Limited was first off the block to introduce indices based on free float market capitalisation methodology. Sensex shifted to free float mechanism effective 01Sep2003. Most of the global equity indices follow free float methodology.
Table 1 gives details of top ten stocks in Dec2011, Dec2016 and Dec2021 > (please click on the image to view better)
In 2011, Infosys, Reliance Industries and ITC Ltd used to dominate Nifty 50 Index (formerly S&P CNX Nifty index). In the next five years, the leadership changed to HDFC Bank, ITC and Infosys--with HDFC Bank climbing to the top by 2016.
Even though Infosys continued to be among the top three in 2011 and 2016, its weight in Nifty 50 index was down from 9.4 per cent in 2011 to 6.7 per cent in 2016.
Between 2011 and 2016, Hindustan Unilever (formerly Hindustan Lever Ltd) and State Bank of India were dethroned from the top ten pedestal and their place among the top ten was occupied by Tata Motors and Kotak Mahindra Bank.
Hindustan Unilever regained its position among the top ten somewhere between 2016 and 2021. Reliance Industries climbed spectacularly between 2016 and 2021 and rules the roost in Nifty 50 now.
Between 2016 and 2021, HDFC Bank gained weight from 8.1 per cent to 8.5 per cent, but lost its bellwether position. In recent quarters, ICICI Bank is snapping at the heels of HDFC Bank. It remains to be seen whether ICICI Bank will be able to surpass HDFC Bank in the future.
And the biggest disappointment in the past five years is ITC, which lost its number two rank and is now at the bottom of the top ten as of December 2021.
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From the above table, readers can observe how stocks changed their ranking as well as their weight in the index over the years between 2011 and 2021.
It can be reasonably guessed that in the next ten years too, Nifty 50 index will change its complexion. It is expected that some new stocks, belonging to nascent sectors of the economy, will dominate the index in the future.
Table 2 gives details of top ten sectors in Dec2011, Dec2016 and Dec2021 > (please click on the image to view better)
Financial services and information technology have remained number one and two respectively in all these years between 2011 and 2021. Between 2016 and 2021, Oil & Gas sector has regained its top three position with the Reliance Industries stock making smart gains after its entry (one could as well say re-entry) into the telecom services sector in 2016.
Though Pharma sector retained its sixth position in 2021, its share in the index fell from 6.3 per cent in 2016 to 3.4 per cent in 2021. Metals sector climbed to seventh position with awesome gains in 2021.
The top three sectors in the index have increased their dominance tremendously between 2011 and 2021. Table 2 reveals interesting pattern between 2011 and 2021.
Financial services, information technology, Oil & Gas and Consumer goods have been dominating (with a combined weight of 78 per cent in 2021) the Nifty 50 index.
Big is Getting Bigger
This is the biggest development in the past five years. Big corporates are getting bigger. The most surprising thing is Corporate India has attained tremendous pricing power (the ability of a company to raise prices of goods and services without any significant impact on the demand) despite the negative impact of the COVID-19 Pandemic on demand in the past two years.
Of course, this is good for a small section who have direct and indirect exposure to equity markets.
If you look at how the stock and sector concentration moved between 2016 and 2021, you will realise that big companies have been getting bigger and their market values have been growing.
For example, top 5 and 10 stocks used to carry a total weight of 34.1 and 52.8 per cent respectively in 2016. But the numbers have grown substantially by 2021 with the top 5 and 10 stocks accounting for 41.5 and 58.4 per cent respectively (table 1 above).
The same story continues with concentration risk reaching higher levels sector-wise also. The top 3 and 5 sectors have increased their weights in Nifty 50 index from 57.5 and 76.9 per cent respectively to 67.0 and 82.7 per cent respectively (table 2 above).
Nifty 50 Index is increasingly getting concentrated with top 10 stocks and top 5 sectors of the economy. Of course, this is only from the listed universe. Unfortunately, some big developments in the Indian economy--especially in the past five to six years--have negatively impacted small and medium businesses.
These developments have provided an opportunity for Corporate India to increase their influence in the economy. Ideally, all businesses, big and small, should have equal opportunity to grow in their respective fields. This seems to be not the case now.
Investment Implications
Sorry for the digression! Coming back to the main point, the increasing concentration risk has investment implications for passive and active investors.
Only a few stocks and sectors dominating the main indices is a positive for passive investors (those who invest in index and exchange trade funds / ETFs). And it is becoming increasingly difficult for active fund managers to beat the indices with high concentration.
The data provide a thumbs-down to the time-tested principles of diversification in portfolio management. This is a challenge for investors and money managers going forward.
As such, in my opinion, it may be advisable to consider taking some exposure, depending one's risk appetite and financial position, to passive investment vehicles. Let us wait and watch what the future holds for investors who go by the credo of diversified portfolios.
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Raw data > Taurus Nifty 50 Index fund; SEBI Bulletin Jan2017 and Nifty 50 factsheet >
References:
NSE Nifty Indices monthly factsheets
NSE Indices Comparison - compare Nifty 50, Nifty Next 50, Nifty 100 and Nifty 500
Mutual fund asset class returns
India Equity ETF Risks and Returns 31Dec2021
BSE 500 versus S&P 500 Indices 31Dec2021
Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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