NSE unveils its upcoming changes to the Nifty Next 50 index, set to take effect on the 29th September 2023. What are these changes about?
We are all familiar with the fact that Nifty holds significant importance as a benchmark in the Indian stock market. However, our focus today will be on Junior Nifty, also referred to as Nifty Next 50.
As the name implies, the Nifty Next 50 Index is a well-diversified index comprising 50 large-cap companies that are excluded from the Nifty 50 index. These companies are ranked between 51st and 100th based on their free-float market capitalisation. Due to its notable growth prospects and potential for development, the Nifty Next 50 Index is often deemed appealing to investors.
The National Stock Exchange (NSE) released exciting news regarding the Nifty Next 50 Index! Effective 29th September, 2023, the NSE has made a bold decision to include only stocks from the derivatives segment in the Nifty Next 50 index. That means stocks with futures and options (F&O) options will take the spotlight. The NSE announced this game-changing move through a consultation paper on 29th May 2023.
Before you get confused about what is happening? Let’s quickly understand what F&O is.
Well, Futures and options (F&O) fall under the derivatives segment. Unlike equity shares, F&O do not possess an independent or standalone value. Instead, their value is derived from the underlying stock price at a specific date.
To illustrate, let’s say a stock is currently trading at Rs 1,000, but you anticipate its price will increase to Rs 1,200. In this scenario, you can opt to purchase a futures contract. The lot size would differ. For example, the lot size of Nifty is 75 units, and you can buy multiple lots. If the price moves as you had anticipated, you will make a profit.
Reason Behind The Change
The decision to include only stocks available in the derivatives segment in the Nifty Next 50 index stems from various reasons outlined by the exchange. According to the notice, there has been a notable rise in the number and asset size of passive funds that track the Nifty Next 50 index. The decision was deemed necessary to facilitate easier replication of the index and enhance liquidity for the stocks involved. Moreover, this move is expected to support the growth of passive funds, aligning with the evolving investment landscape.
Why are Non-F&O Stocks Excluded?
The exclusion of non-F&O stocks from the Nifty Next 50 index stems from specific circumstances. According to CNBC TV18, as of 16th May 2023, out of the 50 stocks in the Nifty Next 50 index, 11 stocks with a weightage of 9.05% were not part of the derivatives segment. The consultation paper highlighted that exposure to these non-F&O stocks has frequently caused the Nifty Next 50 index to reach its price band. As a result, replicating the index for an index portfolio has become less advantageous and is more likely to result in increased tracking errors.
With this change, they aim to resolve the issue of price band breaches and enhance the overall performance and accuracy of the index.
How Will the Exchange Complete the Composition of 50 Stocks?
According to the NSE’s proposal, the composition of the 50 stocks in the Nifty Next 50 index will be determined as follows:
1. F&O Stocks: All F&O stocks that are included in the Nifty 100 index but not part of the Nifty 50 will be included in the Nifty Next 50 index, starting from 29th September 2023.
2. Nifty Midcap 50: To complete the remaining slots in the Nifty Next 50 index, stocks will be selected from the Nifty Midcap 50. The selection will be based on certain criteria, specifically considering stocks whose 6-month average market capitalisation, at the time of review, is at least 1.5 times that of the existing constituents in the Nifty Next 50 index.
Combining F&O stocks from the Nifty 100 (excluding Nifty 50) and selected stocks from the Nifty Midcap 50, the Nifty Next 50 index will be completed, ensuring a diverse representation of companies with sufficient market capitalisation and liquidity.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purpose only. This is not investment advice.