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The Nifty — India’s benchmark 50-stock barometer of the equity market — may soon be replaced by a leaner, meaner index. The NSE, through its group company India Index Services and Products Ltd, on Thursday announced the launch of its new 30-stock index, the NSE Quality 30.
The current benchmark indices — the Nifty and BSE’s 30-stock Sensex — are primarily based on free float market capitalisation.
A company’s market capitalisation is the product of all its shares (including promoter shares) and the stock price, while free-float takes into consideration only those shares available for trading in the market (non-promoter shares). Arindam Saha, spokesperson for the NSE, said instead of focusing on market cap, the Quality Index takes a broader view. “We have two parameters for the Quality Index. One, these stocks have in the past either outperformed the market or at least moved in tandem with it. Two, we have selected stocks with low volatility, so investors tracking the index are protected.”
When assigning quality scores to the 100 largest and most liquid securities listed on the NSE, the key indicators used for stock selection to the new index will be return on equity, debt-to-equity ratio and average year-on-year growth in after-tax profits of the company in the previous three years. By using the new methodology, Saha said the NSE has done away with the practice of including only the biggest companies in an index. “We have included Exide Industries, which does not feature in the benchmark Nifty, in the Quality 30,” he said.
Historical comparison done by the NSE shows that the Quality Index delivered annualised return over the past five years of 18.7 per cent against the Nifty’s 12.6 per cent. Over the past one year, however, the Nifty returned nearly 48 per cent to the Quality Index’s 39 per cent.
Saha said that the next logical step for the NSE would be to eventually replace the Nifty with the Quality Index, once it becomes popular with institutional investors who might choose to use it as a benchmark or launch products.
To start with, the index will be valued once a day, but Saha expects the index to go live soon. Stock selection will be reviewed once a year.
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