NIFTY Alpha 50 vs. NIFTY 50: Unpacking the Difference

In the world of stock market indices, the NIFTY 50 and NIFTY Alpha 50 are well-known benchmarks that represent the performance of the Indian stock market. While both indices are part of the NIFTY family, they serve different purposes and have distinct characteristics.

NIFTY 50: The Iconic Benchmark

The NIFTY 50, often referred to simply as the Nifty, is one of the most prominent stock market indices in India. It was launched in April 1996 by the National Stock Exchange of India (NSE) and includes the 50 largest and most liquid stocks listed on the NSE. The Nifty serves as a barometer for the Indian equity market, reflecting the performance of large-cap companies across various sectors.

Performance

Source: NSE

NIFTY Alpha 50: The Active Alternative

The Nifty Alpha 50 Index tracks NSE-listed securities with high alphas, offering a well-diversified portfolio of 50 stocks. Securities are selected based on criteria like liquidity and market capitalization to ensure replicability and investibility. The index assigns weights to securities according to their alpha values, with the highest alpha receiving the highest weight. This index serves various purposes, including benchmarking fund portfolios, launching index funds, ETFs, and structured products.

Performance

Source: NSE

Methodology

NIFTY 50

1. Market Impact Cost: Market impact cost is a crucial measure of stock liquidity, reflecting actual trading costs. To qualify for Nifty50 inclusion, a stock must have traded at an average impact cost of 0.50% or less for 90% of observations in the last six months with a basket size of Rs. 100 million.
2. Listing History: Eligible stocks should have a listing history of at least 6 months.
3. F&O Eligibility: Only companies allowed to trade in the F&O segment are considered for index inclusion.
4. Minimum Listing History: As of the cutoff date, a minimum listing history of 1 month is required for consideration.
5. Index Re-Balancing: The Nifty50 index is re-balanced semi-annually, with cutoff dates on January 31 and July 31. The average data for the preceding six months is taken into account, and a four-week notice is provided for any changes.
6. Index Governance: Professional teams manage NSE indices, overseen by a three-tier governance structure, which includes the Board of Directors, the Index Advisory Committee (Equity), and the Index Maintenance Sub-Committee.

NIFTY ALPHA 50

1. Company Ranking: Eligible companies must rank among the top 300 companies based on average free-float market capitalization and daily turnover over the last six months.
2. Listing History: A minimum listing history of 1 year is required.
3. Trading Frequency: Companies should demonstrate a 100% trading frequency over the past year.
4. Alpha Calculation: Alpha values of eligible securities are calculated based on trailing 1-year prices, adjusted for corporate actions, and ranked in descending order.
5. Selection: The final 50 companies for index inclusion are chosen based on their alpha values. Securities with positive alpha are preferred; if this criterion isn’t met, the highest alpha in the replacement pool is considered.
6. Re-Balancing: Index reviews occur with data from the six-month period ending on the last trading day of February, May, August, and November.
7. Governance: NSE indices are professionally managed by a three-tier governance structure involving the Board of Directors of NSE Indices Limited, the Index Advisory Committee (Equity), and the Index Maintenance Sub-Committee.

Fundamentals

NIFTY 50

NIFTY ALPHA 50

In summary, the NIFTY 50 and NIFTY Alpha 50 represent two distinct approaches to tracking the Indian stock market. The choice between these two options depends on an investor’s risk tolerance, investment strategy, and belief in the efficiency of the market.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.