The nifty 50 index is an Indian stock market index composed of the top 50 companies based on their free-float market capital.
This post focuses on nifty 50 returns since inception, sector composition, rolling returns, and finally, performance compared to active large-cap funds.
What is Nifty 50?
Nifty 50 Index is a benchmark of the Indian stock market index which represents the largest 50 Indian large blue chip companies and liquid stocks listed on the National stock exchange.
Nifty 50 Index is owned by NSE Indices which is a wholly owned subsidiary of the National Stock Exchange of India.
Nifty 50 covers 13 sectors of the Indian economy and offers investors exposure to the Indian market in one portfolio.
Investors use this index to gauge the performance of the Indian capital market. It is one of the two most followed stock indices in India. Another one is Sensex.
The inception of Nifty 50 Index:
The nifty 50 index has formed on November 3, 1995. Initially, stock selection criteria were based on stock weights based on their full market capitalization.
Later on, in 2009 it adopted the free float methodology.
At its inception in 1995, the Nifty 50 Index represented 33.7 % of full market capitalization and 62.2 % of the turnover of actively traded equities on the National stock exchange.
Over the years, the Nifty 50 Index has adopted market ever-changing dynamics and fared well.
Now Nifty 50 Index represents 53.2 % of full market capitalization and 32.5 % of the turnover of actively traded equities.
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Sector exposition
Nifty 50 has exposure towards 13 sectors. But since its time of inception, the weights of these sectors have changed over time due to evolving market dynamics.
Facts: At its inception ,Nifty 50 index has no weights allocated to IT sector. But as of today, IT sector constituents about 18% of the index.
Like wise financial service sectors have grown from 20% to 37%. But the weights of the consumers goods and metal sectors has declined from 19% to 10.8% and 10.9% to 3.4% respectively over the same period.
Sector exposure of Nifty 50 across the years
There are 12 companies remain in Nifty 50 index since its time of inception.
These 12 companies are in the Nifty 50 since November 1995 and they are currently still in the Nifty 50 as of today.
Composition of Nifty 50 Index
Current constituents of Nifty 50 capture 63.4% of free float market capitalization and 32.4% of turnover of the entire equity market.
Top 10 stocks by weight contribute to 58.3% and the bottom 10 stocks by weight contribute to 5% in the index.
Currently there are 5 stocks with weight greater than 5%, among them Reliance Industries having the highest weight of 10.27%
There are a total 26 stocks in the Nifty 50 which contribute more than 1% by weight.
Nifty 50 rebalance once in six months which are in January 31 and July 31st.
Facts: Across the 25 years, there have been 101 inclusions in Nifty 50 , averaging 4 per year.
Nifty 50 returns Since inception:
Nifty 50 cagr since inception stands at 14.2% CAGR with an annualized volatility of 22.9%. This return represents the total return.
Total return index assumes dividends are reinvested in the index, hence its represents both price return and dividend return. Also the market cap of nifty returns since inception has grown at an 19 % CAGR.
The Nifty 50 TRI has delivered 11.89% CAGR, 17.6% CAGR and 28.4% CAGR over the last 15 years, 5 years and 1 year respectively.
Volatility has been over 22% over the last 15 years, 18.2% over the last 5 years and 15.8% over the last 1 year.
Calendar year return
In terms of calendar year return between 1999 to 2020, the Nifty 50 TR Index has delivered positive returns in 17 out of 22 calendar years.
Positive returns:
Returns were between 0 to 20% in 8 calendar years.
Returns were between 20% to 40% in 5 calendar years.
Returns exceeded 40% in 4 calendar years.
Negative returns:
Out of the 5 calendar years , Nifty 50 TR index negative returns between 0 to -20% in 3 calendar years and less -20% in 2 calendar years.
Rolling Returns:
Nifty 50 TR index has delivered positive return 74.2%, 80%, 92.4% over the period of 1 year, 2 years, 3 years time horizons based on the daily rolling return analysis.
As the investment horizon increases to 5 year, the positive returns are nearing to 100%.
The interesting fact is longer the time given, Positive returns are 100% in 7 year and 10 year time period respectively.
Nifty 50 index has delivered returns above than 15% CAGR for 47.9% of the time in a 10 year time period based on rolling return data analysis.
Observations:
Even if you invested have a day before market crash in Nifty 50 , it would have given positive returns in 3 to 5 years of time.
Longer your holding period, chances of positive returns becomes bigger and bigger.
Why? The underlying business in an index becomes more productive and generate more profits. The same is reflected in the index.
Moreover, Nifty 50 is a rule based index where it flushes out companies from its index as market cap gets shrinks and pulls in new companies with emerging market cap.
Its a not “buy and hold” strategy inside index. Since the index operates methodologically, its has neither emotions or favoritism like humans when it comes to throwing poor performer out of index. Its purely rationale!
Outperformance of Nifty 50 over active large cap funds
In the past, actively managed large cap funds were able to generate reasonable alpha’s by outperforming the benchmark, but nowadays it has become exceedingly difficult.
One possible reason for such underperformance could be substantial increase in asset under management across the equity mutual fund schemes specifically flowing into large cap funds resulting in more money chasing a handful number of stocks.
Also the financial markets becoming informationally efficient , specifically for well researched large cap stock and with standardization of fund categories by the regulator, generating alphas in this scenario consistently beating the benchmark has become exceedingly difficult.
Percentage of large cap funds underperforming Nifty 50 Index.
Overall, on an average 68% of actively managed large cap funds underperform the Nifty 50 total return index.
Final Thoughts:
There is a moving trend in the financial world where investors are moving to passively managed funds rather than investing in active funds.
When a index follows a rule rigorously , irrespective of market behavior combined with lower fees it tend to outperform over many active funds on a longer period of time.
But those who put their faith in Nifty 50 Index and invest in thick & thin times, especially more during the thin times and continue their investing journey for a decade or two or more will be rewarded handsomely.
Thank you for reading!
