NSE Emerging Indices Comparison 31Mar2024
(This
is for information purposes only. This should not be construed as a
recommendation or investment advice even though the author is a CFA Charterholder. Please consult your financial
adviser before taking any investment decision. Safe to assume the author has a vested
interest in stocks / investments discussed if any.)
Traditionally, mid- and small-cap stocks are considered as risky from stock volatility, illiquidity and insolvency point of view. But things seem to have changed in recent years.
Since 2014, mid- and small-cap stocks have been performing well compared to large-cap stocks in India -- except in 2018 and 2019 when mid- and small-cap stocks were singed by IL&FS default scam, listless economic growth in India and other structural issues.
You can compare performance of large-, mid- and small-cap stocks and funds over the past 10 years here and here.
This blog briefly explores how Nifty Indices (Indices from NSE) are constructed and how some of the broad market indices from the equity stable compare in terms of fundamentals, top stocks and top sectors.
NSE or National Stock Exchange of India Limited is a premier stock exchange in India, closely followed by BSE Limited.
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Related blogs on Indian Stock Indices:
India Passive Funds and Their Asset Size 29Apr2024
Understanding Real Sensex and Currency Debasement 14Mar2024
Equity ETFs and Equity Index Funds Compared 05Feb2024
Nifty 50 Index Yearly Movement 31Dec2023
Nifty 50 Index Quarterly Movement 31Mar2023
BSE 500 versus S&P 500 Compare 31Mar2023
Nifty 50 Index Yearly Movement 31Dec2022
NSE Indices Comparison 31Dec2022
BSE 500 versus S&P 500 Comparison 31Dec2022
Nifty 50 Index quarterly movement Apr2022
Nifty 50 Index Evolution 2011 to 2021
NSE Indices Comparison 31Dec2021
2. NSE Emerging Indices Comparison
Nifty Indices Limited is the index provider for NSE. NSE has launched a variety of indices divided into six categories, namely:
1. Broad Market Indices
2. Sectoral Indices
3. Thematic Indices
4. Strategy Indices
5. Fixed Income Indices
6. Hybrid Indices
There are 17 broad market indices from Nifty Indices and all of them are from the equity segment. And their structure is as follows:
Nifty 50 index is the most important stock market index from the NSE stable. Other key broad market stock indices include, Nifty Next 50, Nifty 500, Nifty Midcap 150, Nifty Smallcap 250 and Nifty Total Market.
Their Construction
Let us briefly explain how some of these stock indices are constructed.
1. Nifty 500 represents the top 500 companies based on full market capitalisation from the eligible universe.
2. Nifty Midcap 150 represents the next 150 companies (companies ranked 101-250) based on full market capitalisation from Nifty 500. This index intends to measure the performance of mid market capitalisation companies.
3. Nifty Smallcap 250 represents the balance 250 companies (companies ranked 251-500) from Nifty 500. This index intends to measure the performance of small market capitalisation companies.
4. Nifty 100 represents top 100 companies based on full market capitalisation from Nifty 500. This index intends to measure the performance of large market capitalisation companies.
2. Nifty Midcap 150 represents the next 150 companies (companies ranked 101-250) based on full market capitalisation from Nifty 500. This index intends to measure the performance of mid market capitalisation companies.
3. Nifty Smallcap 250 represents the balance 250 companies (companies ranked 251-500) from Nifty 500. This index intends to measure the performance of small market capitalisation companies.
4. Nifty 100 represents top 100 companies based on full market capitalisation from Nifty 500. This index intends to measure the performance of large market capitalisation companies.
5. Nifty 50 represents 50 companies selected from the universe of Nifty 100 based on free-float market capitalisation and liquid companies.
6. Nifty Next 50 represents the balance 50 companies from Nifty 100 after excluding the Nifty 50 companies.
All the above six Nifty indices are rebalanced / reconstituted semi-annually (last working day of March and September).
A pictorial representation of select Nifty Indices is given below:
The author has several times in the past compared select Nifty Indices, namely, Nifty 50, Nifty Next 50, Nifty 100 and Nifty 500.
As mentioned above, the investor interest has shifted to mid- and small-cap indices and stocks in recent years.
Now, let us examine how four stock indices from 'Broad Market Indices' namely, Nifty 500, Nifty Next 50, Nifty Midcap 150 and Nifty Smallcap 250 measure up against one another.
3. Fundamentals
Table
1 presents the returns, risks and valuation measures of four
indices, namely, Nifty 500, Nifty Next 50, Nifty Midcap 150 and Nifty Smallcap 250 (all data as of 31Mar2024) >
It may be noted 28th of March was the last trading day of March 2024.
Please click on the image to view better >
On a one-year basis, Nifty Next 50 has provided the best return of 61 per cent, though on a 5-year basis, Nifty Next 50 and Nifty 500 delivered similar annualised returns of around 17 per cent.
The 5-year returns of Nifty Midcap 150 and Nifty Smallcap 250 are similar at 23.3 and 22.5 per cent respectively.
If you see 5-year standard deviation, an indicator of volatility, Nifty Smallcap 250 is the most volatile of the four.
In terms of price-earnings (P/E) ratio, Nifty Midcap 150 appears to be the most expensive. It may be noted investors may be expecting superior growth in revenues and profits from the mid-cap stable.
Nifty Next 50 is providing the highest dividend yield of 1.3 per cent, among the four indices, in the aggregate -- though a dividend yield of 1.3 per cent is meagre by historical standards.
Indian stocks offer one of the lowest dividend yields in the world.
Why is Nifty Next 50 index providing better dividend yield among the four? This must be due to the fact that stocks of public sector undertaking (PSUs) form a substantial part of the index, and PSUs offer higher dividends to shareholders in order to satisfy the needs of their owner, the Government of India.
Overall, stocks in India appear to be expensive compared to history as well as other emerging markets. However, it must be added Indian companies offer better profitability metrics, like, return on equity (RoE) and return on capital employed (RoCE).
4. Top 15 Stocks
Please click on the image to view better >
Of the four indices, Nifty 500 suffers from high concentration risk with top 5 and top 10 stocks accounting for 23.6 and 34 per cent respectively of the total weight. In terms of sectors also, Nifty 500 is the most concentrated of the four (see Section 5 below).
Before worrying too much about concentration risk, it may be noted Nifty 500 has 501 stocks, Nifty Next 50 has 50, Nifty Midcap 150 has 150 and Nifty Smallcap 250 has 250 stocks.
As such, the concentration risk based on top 5 and 10 stocks is strictly not useful among these four select indices.
Details of top 15 stocks in the indices are provided in tables 2 and 3 above.
Top 3 stocks in Nifty 500 are:
HDFC Bank Ltd.
Reliance Industries Ltd.
ICICI Bank Ltd.
Top 3 stocks in Nifty Next 50 are:
Reliance Industries Ltd.
ICICI Bank Ltd.
Top 3 stocks in Nifty Next 50 are:
Trent Ltd.
Bharat Electronics Ltd.
Tata Power Co. Ltd.
Top 3 stocks in Nifty Midcap 150 are:
Bharat Electronics Ltd.
Tata Power Co. Ltd.
Top 3 stocks in Nifty Midcap 150 are:
Max Healthcare Institute Ltd.
Indian Hotels Company Ltd.
Suzlon Energy Ltd.
Top 3 stocks in Nifty Smallcap 250 are:
Indian Hotels Company Ltd.
Suzlon Energy Ltd.
Top 3 stocks in Nifty Smallcap 250 are:
Crompton Greaves Consumer Electricals Ltd.
Multi Commodity Exchange of India Ltd.
Cyient Ltd.
Multi Commodity Exchange of India Ltd.
Cyient Ltd.
5. Top 10 Sectors
Please click on the image to view better >
Nifty 500 turns out to be the most concentrated with top three and five sectors accounting for 48 and 62 per cent of the total weight respectively.
The least concentration of sectors is from Nifty Smallcap 250. The share top 3 and top 5 sectors in the index is 44.9 and 56.8 per cent respectively.
As mentioned in Section 4 above, the number of stock components held by the four indices are widely different.
As such, the concentration risk based on top 3 and top 5 sectors may not be a useful metric.
6. Summary
The idea of the blog is to check whether these four indices have unique or similar risk / return characteristics and whether they provide risk / return exposures wanted by investors.
Valuation
If you see traditional valuation measures, like, P/E ratio, price-to-book value (P/B ratio) and dividend yields, all the four indices look expensive (Table 1 above). Of course, we need to see growth prospects and historical valuations also.
Some investors want stability of large-cap stocks and lower volatility and they may seek to have exposure towards large-cap oriented index, like, the Nifty 500 index.
First-time investors may be better off investing systematically using dollar-cost (rupee-cost) averaging concept.
Other investors may be seeking greater returns from mid- and small-cap stocks, even though the stocks are more volatile in nature. They may be comfortable with exposures to Nifty Midcap 150 and Nifty Smallcap 250.
Risk Measures
One-year standard deviation is in the range of 10.2-14.8 per cent. But 5-year SD is in much narrower range of 18.4-20 per cent, though Nifty Smallcap 250 has the highest SD.
If you check 5-year beta values, the range is 0.81-0.95 indicating the co-movement of these four indices is similar and they closely track the performance of Nifty 50.
The close range of beta values indicates that these four indices move more or less in tandem with the overall market. If market rises, the indices too rise and vice versa.
Return metrics
If you observe year-to-date, one-year and five-year returns, you can see that the returns are different for each index. But five-year returns of Nifty 500 and Nifty Next 50 are similar -- as their concentration is toward large-cap stocks (Table 1).
Nifty Midcap 150 and Nifty Smallcap 250 too have similar five year returns indicating similar long term returns for these two indices.
In future also, we shall see how these four indices will stack up in terms of their risk and return characteristics.
Please beware of the risks involved in passive funds before investing. This should not be construed as a recommendation or investment advice. Indices mentioned here are used for illustration purposes
only. Prospective investors must consult their financial adviser before
making any investment decisions.
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References and additional data:
Fruits of the Midi (1881) by Pierre-Auguste Renoir
Nifty Passive Insights Mar2024 PDF
NSE Index Methodology Document Apr2024 PDF
Check Rupee Vest MF portfolio for all stock weights
Nifty Indices - Index factsheet
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SEBI Categorization and Rationalization of Mutual Funds
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Disclosure: I've got a vested interest 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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