NIFTY Index Rebalancing: What it means for Indian Investors

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.

The semi-annual rebalancing of NIFTY indices will happen on 29 March, and rebalancing will take effect from 31 March. Today, we will learn about rebalancing in general and the changes in this cycle.

Why rebalancing happens - Criteria for inclusion and exclusion?

Before we discuss anything, it is crucial to understand the reasons why different NIFTY indices undergo rebalancing. It will help you understand the impact of outgoing and incoming stocks. 

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. 

Which indices will see a change from 31 March?

The NIFTY brand has over 350 indices under it as of February 2023. 

Under the current change, no changes are expected in Nifty, Nifty Bank, and Nifty IT. However, minor weight changes are likely to be made. Below are the expected inflows and outflows of the NIFTY50 indices after weight changes:

• Kotak Mahindra Bank: +$18 million
• HDFC: +$17 million
• Axis Bank: +$14 million
• HDFC Bank: +$14 million
• ICICI Bank: +$13 million 
• RIL: -$42 million
• Infosys: -$39 million
• M&M: -$24 million
• Bharti Airtel: -$11 million
• Cipla: -$4 million 

Below are the expected inflows and outflows of NIFTY BANK indices after rebalancing:

Kotak Mahindra Bank, ICICI Bank, and HDFC Bank are expected to see outflows of $7 million, $26 million, and $31 million, respectively. SBI, IndusInd Bank, and Axis Bank are among the stocks that will see their weightage going up in the index, resulting in potential inflows.

Nifty Next 50

Among the major NIFTY indices, NIFTY Next 50 will see the major changes - 5 stock changes in the index. 

• Effective 31 March, the companies that are likely to become part of the index are ABB India, Adani Wilmar, Canara Bank, Page Industries, and Varun Beverages.
• On the other hand, Mphasis, Bandhan Bank, Biocon, Gland Pharma, and Paytm will exit the NIFTY Next 50 index.

Nifty Midcap 100

Under the NIFTY Midcap100 index, the inclusions and exclusions are as below:

• Exclusions: ABB India, Adani Wilmar, Page Industries, Emami, Gujarat State Petronet, ICICI Securities, Canara Bank, Clean Science and Technology, Indiamart Intermesh, Linde India, NALCO, Indian Energy Exchange, Nippon Life India Asset Management, Varun Beverages.
• Inclusions: Adani Power, Apollo Tyres, CG Power and Industrial Solutions, Bandhan Bank, Biocon, NMDC, One 97 Communications, Devyani International, Gland Pharma, Gujarat Fluorochemicals, IRFC, MphasiS, NHPC, Piramal Enterprises.

Nifty Smallcap 50

• Exclusions: Alok Industries, Amber Enterprises, Metro Brands, Sterlite Technologies, Can Fin Homes, Chemplast Sanmar, Firstsource Solutions, Apollo Tyres, Balrampur Chini, Indigo Paints, Intellect Design, TV18 Broadcast, Zensar Technologies.
• Inclusions: Bikaji Foods, Mazagon Dock Shipbuilders, NALCO, City Union Bank, Easy Trip Planners, Indian Energy Exchange, Indian Overseas Bank, Global Health, IDBI Bank, IRB Infrastructure, Rail Vikas Nigam, Suzlon Energy, UCO Bank. 

What should investors do when rebalancing happens?

As an investor, there are a few things you can do when index rebalancing happens:

• Understand the rebalancing process: Before taking any action, it is essential to understand how the index is being rebalanced, which stocks are being added or removed, and how this might affect the performance of the individual stocks or index. We hope this article helped you better understand the process.
• Reassess your investment strategy: Index rebalancing can be an opportunity for investors to reassess their investment strategy and make any necessary adjustments. For example, you might consider rebalancing your portfolio to align with the changes in the index, or you might use the opportunity to sell or buy individual stocks that are being added to or removed from the index.
• Be prepared for volatility: Index rebalancing can lead to increased volatility in the stock market, as investors adjust their holdings to reflect the changes in the index. It is essential to be prepared for this volatility and to have a plan in place for how you will respond to any sudden market movements.
• Consider the long-term: Index rebalancing is a short-term event that can have a temporary impact on stock prices. Investors must have a long-term outlook for the companies in the index and not overreact to short-term market movements.

Conclusion

Index rebalancing can be a significant event for investors, but it is essential to approach it with a level head and a long-term perspective. By understanding the process, reassessing your investment strategy, being prepared for volatility, and considering the long-term outlook, you can make informed decisions that will help you achieve your investment goals.

This is not investment advice. Investments in the securities market are subject to market risk, read all the related documents carefully before investing. Past performance is not indicative of future returns.