Nuvama Institutional Equities has indicated that the Nifty Next 50 index may undergo changes in its computation methodology, leading to the exclusion of eleven non-F&O stocks.
These stocks, namely Avenue Supermarts, Varun Beverages, Bajaj Holdings, Adani Green Energy, Zomato, Adani Transmission, Adani Total Gas, FSN E-Commerce Ventures, P&G Hygiene, LIC, and Adani Wilmar, currently hold a collective weightage of 9.05 percent in the Nifty Next 50 index.
The Nifty Next 50 index serves as the second tier of liquid securities after the Nifty 50. According to Abhilash Pagaria, the Head of Nuvama Alternative & Quantitative Research, the inclusion of non-F&O stocks that frequently experience price bands hampers efficient replication of the index portfolio and contributes to higher tracking errors.
Only F&O stocks to Be Included in The Index
To address this issue, NSE Indices has released a discussion paper proposing that only stocks traded in the futures and options (F&O) segment should be included in the index. Pagaria suggests that limiting the index to F&O stocks will improve replication ease for passive funds.
The proposed implementation will occur in two phases. In the first phase, starting from June 30, the weightage of these eleven non-F&O stocks will be reduced. The cumulative weightage for these stocks will decrease from 9.05 percent to 5 percent. In the second phase, scheduled for September 30, these stocks will be removed from the index, and a new set of stocks will be added.
New Stocks to be Added in the Index
It’s important to note that this is currently a consultation, and the final implementation will be announced by the exchange by the third week of June, according to Pagaria. If these changes are implemented, Shriram Finance, AU Small Finance Bank, Trent, Indian Hotels, TVS Motor Company, Cummins India, Jindal Steel and Power, Polycab, Punjab National Bank, Zydus Lifesciences, and Abbott India are expected to enter the Nifty Next 50 index.
Nuvama’s calculations suggest that Shriram Finance, AU Small Finance Bank, Trent, and Indian Hotels could experience inflows of over $40 million due to these changes. These modifications are significant as numerous exchange-traded funds and index funds are benchmarked to the Nifty Next 50 index.
