Index investing is slowly but gradually gaining popularity in India. Many investors are investing in indices - directly via ETF or mutual funds. For this reason, investors must understand which companies are included and which ones are excluded from the index. For others, the index rebalancing gives useful information to investors - a series of stocks see inflows and outflows after the rebalance, which is a significant event.
Justified to know (J2K)
Student: Why is it crucial to understand the reasons behind different Nifty indices undergoing rebalancing;
Teacher: The simple answer is to understand the impact of outgoing and incoming stocks.
Why rebalancing happens & criteria for inclusion and exclusion
Different indices are rebalanced semi-annually to ensure that they reflect changing market conditions and the performance of the underlying companies. Below are some reasons why the indices are rebalanced semi-annually:
Changes in market capitalization:
The market capitalization of companies listed on the NSE changes over time because of changes in their stock prices and the number of outstanding shares. Rebalancing the index allows for adjustments to be made to reflect these changes and ensure that the index remains representative of the overall market.
New listings:
New companies may be listed on the NSE, and existing companies may be delisted or merged with other companies, which can impact the index. Rebalancing the index allows for these changes to be reflected in the index.
Sectoral weightage:
The Nifty index is designed to reflect the performance of different sectors of the economy. Rebalancing allows for adjustments to be made to ensure that the sectoral weightage remains balanced and reflects the changing trends in the economy.
Liquidity:
Rebalancing the index ensures that there is enough liquidity in the index, which is essential for investors who use the index to track the performance of the market and for those who invest in index funds.
Present day
In a notification on Tuesday 4th July 2023, NSE said, "The Index Maintenance Sub-Committee (Equity) of NSE Indices Limited has decided to make replacement of stock in various indices as listed hereunder on account of scheme of amalgamation of Housing Development Finance Corporation (NS:HDFC) with HDFC Bank (NS:HDBK). These changes shall become effective from July 13, 2023 (close of July 12, 2023)."
HDFC Bank's merger has led to the replacement of HDFC share price on various indices by LTI Mindtree (NS:MINT), Jindal Steel & Power (NS:JNSP), and not just these 2, many other stocks will be replacing HDFC on several indices on NSE including Financial Services, Nifty 200, Nifty 500 and Services Sectors among others. LTI Mindtree has also replaced HDFC in Nifty Services Sector.
Further, on Nifty 100, metal giant Jindal Steel & Power (JSPL) will replace HDFC and the same will be applicable on the Nifty100 Equal Weight index. With LTI Mindtree entering Nifty 50, the stock will be replaced by JSPL on Nifty Next 50. Also, Mankind Pharma will replace HDFC on the Nifty 500, Nifty 200, Nifty LargeMidcap 250, and Nifty Total Market.
In terms of sectoral indices, on Nifty Financial Services, LIC Housing Finance (NS:LICH) will replace HDFC and the same will reflect on the Nifty Financial Services 25/50 index.
Apart from this, HDFC will be replaced by stocks like -- Poonawalla Fincorp (NS:POON) on the Nifty Financial Services Ex-Bank index; Phoenix Mills on the Nifty Housing index; Brigade Enterprises (NS:BRIG) on Nifty Core Housing; and Ambuja Cements (NS:ABUJ) on Nifty High Beta 50.
HDFC will also exit the environmental, social, and corporate governance (ESG) indices such as Nifty100 ESG, Nifty100 Enhanced ESG, and Nifty100 ESG Sector Leaders.
Conclusion
Typically, on NSE, the NIFTY 50 is a diversified 50 stock index accounting for 13 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index-based derivatives, and index funds.
By the end of July 4, HDFC's market cap stood at over ₹5.33 lakh crore, while LTI Mindtree's market value was over ₹1.55 lakh crore. On NSE, HDFC shares closed at ₹2,884.50 apiece up by 0.5% and LTI Mindtree settled at ₹5,242 apiece higher by 0.59%. LTI Mindtree also touched a new 52-week high of ₹5,275.35 today (on 4th July)
As per market estimates, LTI Mindtree should see an inflow of about $150-160 million from passive funds due to inclusion in the Nifty index. With a revenue of about $4.2 billion, LTI Mindtree, a subsidiary of L&T, trails behind TCS (NS:TCS), Infosys (NS:INFY), HCL Tech (NS:HCLT), Wipro (NS:WIPR), and Tech Mahindra (NS:TEML). (ranked 6th largest);
Other stocks mentioned above will also have a similar effect due to HDFC's exit from various indices.
Disclaimer: The above article is for self-educational purposes. The analysis was conducted by the following students: G10 and JayN for learning purposes.
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