Complete Guide to Nifty Indices: Understanding NSE’s Equity Index Methodology (2025)

 

Complete Guide to Nifty Indices: Understanding NSE’s Equity Index Methodology (2025)


The Indian stock market, through the National Stock Exchange (NSE), offers various equity indices. These indices help track market movements, sectors, themes, and strategies. NSE Indices Limited (formerly IISL) develops and manages them.

This guide explains how these indices are structured, how stocks are selected, how reviews happen, and the key indices that shape India's equity landscape.

What Are Nifty Indices?

Nifty indices are rule-based benchmarks. They cover different parts of the Indian stock market like:

  • Broad market (large-, mid-, small-, and micro-cap)

  • Sectoral (industry-specific)

  • Thematic (focused on trends)

  • Strategy-based (factor-driven)

These indices are used by retail investors, mutual funds, and institutions to track performance and build portfolios.

1. Broad Market Indices

These indices cover companies of various sizes:

  • Nifty 500: Top 500 companies by full market capitalization.

  • Nifty 100: Top 100 large-cap stocks from Nifty 500.

  • Nifty Midcap 150: Mid-cap companies ranked 101–250.

  • Nifty Smallcap 250: Small-cap firms ranked 251–500.

  • Nifty 50: The most liquid 50 large-cap stocks.

  • Nifty Next 50: The next 50 after Nifty 50.

Review Process: Indices are rebalanced twice a year (March and September). Reviews are based on six-month average data covering market cap, liquidity, and impact cost.

2. Eligibility Criteria for Inclusion

To be part of a Nifty index, companies must meet these conditions:

  • Listed and actively traded on NSE.

  • Minimum 10% free float or meet a market cap threshold.

  • High liquidity: Impact cost below 1% (or 0.5% for Nifty 50) for a ₹10 crore portfolio.

  • Traded on at least 90% of trading days in the last 6 months.

Special Cases:

  • New Listings: Reviewed after 1 month.

  • Corporate Events: Mergers/demergers lead to re-evaluation post-event.

3. Nifty 50: The Flagship Index

The Nifty 50 is India’s most tracked index. It covers 66% of NSE’s market cap. The index includes blue-chip, sector-diverse, and highly liquid stocks.

  • Derivatives available since 2000 (futures) and 2001 (options).

  • Semi-annual review.

  • Maximum 5 changes per year, unless special events occur.

4. Thematic and Strategy Indices

These indices go beyond size and sector. They follow investment themes or financial factors.

Thematic Indices:

  • Nifty India Consumption

  • Nifty EV & New Age Automotive

  • Nifty Manufacturing

  • Nifty Railways PSU

These reflect policy themes like EV, consumption, and infrastructure.

Strategy Indices (used in smart-beta ETFs):

  • Nifty Alpha 50

  • Nifty Low Volatility 50

  • Nifty Momentum 50

  • Nifty Quality 30

  • Nifty Dividend Opportunities 50

These are based on investment styles like value, quality, and momentum.

5. Multi-Cap & Combination Indices

These offer diversified exposure across all caps:

  • Nifty500 Multicap 50:25:25: 50% large, 25% mid, 25% small caps.

  • Nifty500 LargeMidSmall Equal-Weight: Equal weight to each cap tier.

  • Nifty Total Market Index: Combines Nifty 500 + Microcap 250.

Great for mutual funds wanting all-in-one benchmarks.

6. Microcap & Total Market Indices

  • Nifty Microcap 250: Covers the 250 companies beyond Nifty 500.

  • Nifty Total Market: Combines top 750 companies, giving full-market exposure.

Useful for capturing India's emerging companies and startups.

7. Sectoral Indices

These track specific industries. Key ones include:

  • Nifty Bank

  • Nifty IT

  • Nifty Auto

  • Nifty FMCG

  • Nifty Pharma

  • Nifty Metal

  • Nifty Financial Services (also Ex-Bank and 25/50 variants)

They are often used to create sectoral ETFs. Index capping ensures no single stock dominates.


8. Index Rebalancing and Corporate Events

  • Most indices are rebalanced twice a year (Jan & July data).

  • Some undergo quarterly changes to comply with SEBI norms.

Events like mergers, delistings, or suspensions can lead to early changes in index composition.

9. Methodology Essentials

  • Index calculation is based on free-float market capitalization.

  • Capping is used to prevent over-concentration.

  • Impact cost is tracked as a liquidity measure.

  • Stocks with DVRs (Differential Voting Rights) may be allowed with conditions.

10. Uses of Nifty Indices

Nifty indices serve many purposes:

  • Benchmarking: For mutual funds and portfolio managers.

  • Index funds and ETFs: Built directly on Nifty indices.

  • Derivatives: Options and futures are based on indices like Nifty 50.

  • Factor investing: Smart-beta funds use Nifty strategy indices.

Final Thoughts

Nifty indices offer a transparent, structured, and diverse way to track India’s stock market. They help investors of all kinds—retail or institutional—make informed, strategic decisions. With regular reviews and clear rules, NSE ensures these benchmarks stay relevant and investable.

Frequently Asked Questions (FAQs)

1. What is the Nifty 50 Index?

The Nifty 50 is NSE's benchmark index, representing 50 large-cap, highly liquid companies from various sectors. It covers about 66% of NSE's total float-adjusted market capitalization.

2. How is a stock selected for inclusion in Nifty indices?

Stocks are selected based on criteria like free-float market capitalization, trading frequency (90% of trading days), impact cost, and liquidity. Only stocks listed and actively traded on NSE are eligible.

3. How often are Nifty indices reviewed or rebalanced?

Most Nifty indices are reviewed semi-annually—in March and September—using six months of data. Some indices also have quarterly adjustments for weight capping and compliance.

4. What is the Nifty500 Multicap 50:25:25 Index?

This index allocates 50% weight to large-cap stocks, and 25% each to mid- and small-cap stocks. It is rebalanced quarterly and helps investors maintain diversified exposure.

5. What is the difference between Nifty 100 and Nifty 500?

Nifty 100 includes the top 100 large-cap companies, whereas Nifty 500 includes the top 500 companies across large, mid, and small-cap segments, offering broader market exposure.

6. Are newly listed companies included in Nifty indices?

Yes, but they are evaluated based on one-month trading data. They must meet eligibility criteria such as liquidity, free-float market cap, and trading frequency.

7. What is the impact cost, and why does it matter for index inclusion?

Impact cost measures the transaction cost of executing trades in a stock. For Nifty 50, it must be ≤0.50% to ensure high liquidity and efficiency.

8. What are strategy indices like Nifty Alpha or Nifty Momentum?

These are smart-beta indices based on quantitative factors such as return consistency (Alpha), price momentum, low volatility, or high dividends. They are used for passive investing.

9. Can investors trade Nifty indices directly?

Investors can’t trade indices directly, but they can invest via index funds, ETFs, or trade derivatives like Nifty futures and options.

10. What is the Nifty Total Market Index?

It’s a broad index combining Nifty 500 and Nifty Microcap 250, representing around 750 companies. It offers the most comprehensive exposure to India’s equity market.

Location: Ahmedabad, Gujarat, India

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