Why do we need to track the weightages of Nifty 50 stocks in the index?
Because seemingly, the index is witnessing a concentration risk for some time now. And hence, those who track Nifty50 or invest in index funds tracking Nifty50 should understand this risk.
And to answer the question as to why track this data point, I strongly recommend you read this post on Concentration Risk in Top-3, Top-5 and Top-10 stocks in Nifty. Once you have read this, you will understand why this is something worth tracking. And it is all the more important for those who invest predominantly in large cap stocks. They should also read Should I shift from active large cap funds to index funds?
Nifty 50 is made up of 50 stocks of different weightages. It is generally claimed to be a well-diversified index that represents the Indian markets sufficiently well. Whether it’s true or not is something to be debated.
So here is the October 2020 data of index constituents and weightages, you will notice that out of the 50 stocks in the index:
- Top 3 stocks in Nifty50 account for 31.2% weightage (was 32.2% in Sept-2020)
- Top 5 stocks in Nifty50 account for 43.6% weightage (was 44.0% in Sept-2020)
- Top 10 stocks in Nifty50 account for 62.6% weightage (was 62.1% in Sept-2020)
The concentration in Top-3 and Top-5 stocks have come down a bit compared to September 2020. But this is still a very high level of concentration in just a few stocks if you ask me.
Monthly data is regularly updated on NSE’s website here.
And here is a list of top 10 stocks with weightages:
- Reliance Industries Ltd. – 13.24%
- HDFC Bank Ltd. – 10.25%
- Infosys Ltd. – 7.74%
- Housing Development Finance Corporation Ltd. – 6.87%
- Tata Consultancy Services Ltd. – 5.58%
- ICICI Bank Ltd. – 5.4%
- Kotak Mahindra Bank Ltd. – 4.52%
- Hindustan Unilever Ltd. – 3.69%
- ITC Ltd. – 2.88%
- Axis Bank Ltd. – 2.43%
- Larsen & Toubro Ltd. – 2.26%
- Bharti Airtel Ltd. – 2.08%
- Asian Paints Ltd. – 1.99%
- Maruti Suzuki India Ltd. – 1.85%
- HCL Technologies Ltd. – 1.82%
- Bajaj Finance Ltd. – 1.75%
- State Bank of India – 1.45%
- Nestle India Ltd. – 1.22%
- Dr. Reddy’s Laboratories Ltd. – 1.18%
- Mahindra & Mahindra Ltd. – 1.13%
- UltraTech Cement Ltd. – 1.05%
- Wipro Ltd. – 1.01%
- Sun Pharmaceutical Industries Ltd. – 1%
- Tech Mahindra Ltd. – 1%
- Titan Company Ltd. – 0.97%
- HDFC Life Insurance Company Ltd. – 0.93%
- Power Grid Corporation of India Ltd. – 0.87%
- NTPC Ltd. – 0.85%
- Britannia Industries Ltd. – 0.82%
- Divi’s Laboratories Ltd. – 0.8%
- Cipla Ltd. – 0.76%
- Bajaj Auto Ltd. – 0.75%
- Hero MotoCorp Ltd. – 0.72%
- Bajaj Finserv Ltd. – 0.67%
- IndusInd Bank Ltd. – 0.66%
- Tata Steel Ltd. – 0.62%
- Grasim Industries Ltd. – 0.61%
- JSW Steel Ltd. – 0.61%
- SBI Life Insurance Company Ltd. – 0.6%
- Eicher Motors Ltd. – 0.58%
- Shree Cement Ltd. – 0.58%
- Bharat Petroleum Corporation Ltd. – 0.57%
- Adani Ports and Special Economic Zone Ltd. – 0.52%
- UPL Ltd. – 0.5%
- Hindalco Industries Ltd. – 0.5%
- Coal India Ltd. – 0.48%
- Oil & Natural Gas Corporation Ltd. – 0.47%
- Tata Motors Ltd. – 0.47%
- Indian Oil Corporation Ltd. – 0.4%
- GAIL (India) Ltd. – 0.31%
Remember that from a diversification perspective, the more concentrated an index is, the higher will be its vulnerability to few stocks. And that is the whole premise of having a well-diversified index that spreads the bets across various stocks and sector sufficiently well. And since the index funds and ETFs in India which replicate these indices have similar portfolio composition, they too expose themselves to this risk which results in higher concentration of portfolio in just a few stocks. This is something to made note of by the index funds investors and also those who invest predominantly in large cap funds.
(To know more about various indices, do read Explained: Nifty Indices like Nifty50, Nifty Next 50, Nifty 500 & Others)
(Soon, I will try to write in detail about the index funds vs large-cap funds discussion)
So what should you do?
To each his own. And it depends on one’s risk appetite, financial goals and understanding of the markets. When doing taking client for Full Goal-based Financial Planning or for HNI Advisory, I review and customize their mutual fund portfolios as per their unique requirements. At times, it is enough to have just the passive funds when the investor has low equity exposure and belong to the conservative category. At other times, it’s a combination of passive and active funds.
If you are unable to manage your investments and are not sure how to divide your portfolio between active and passive funds, then its best to contact a SEBI-registered Investment Advisor to help you with it.
Very nice. Would love to hear your thoughts on the performance & credibility of different AMCs with its age, team, AUM, diversifications, expertise… as indicators