e a base of 3 November 1995 as 1000. On December 31, 2001, i.e. nearly six years later, NIFTY 50 was at 1059.05 while NIFTY 50 TR was at 1150.28. The difference in the two levels is the return obtained on reinvestment of dividends through the intervening period.
No. The market-cap weighted index is "self weighting". I.e. when weights change because prices change, yesterday's index portfolio continues to be today's index portfolio. Hence a buy and hold strategy is all that is required to replicate index returns under normal circumstances. Note that someone who buys and holds a NIFTY 50 portfolio earns dividends, this should be compared with the NIFTY 50 TR index and not plain NIFTY 50.
When corporate actions take place, the market capitalisation changes and weights have to be adjusted. Rights issues, public issues and mergers all present such problems. Of course, when index set changes take place, the portfolio has to be adjusted and weights get modified. This requires elaborate, and consistently-applied policies. These policies have been the subject of great attention and care at NSE Indices and are fully disclosed to the public.
NIFTY 50 is available from 3 July 1990. The historical data is calculated in an intelligent way, i.e. the index set steadily evolves even through the older years. The historical NIFTY and NIFTY-TR are very useful for researches.
From a mutual fund investors point of view, the fund manager should accurately replicate returns on the index. The liquidity filtering in NIFTY 50 and numerous operational details about index management, help ensure accurate tracking. When investors see that an index fund is unable to replicate the returns on an index, they would have dark fears and would abandon the product. NIFTY 50 is the best index in India in terms of the accuracy of tracking possible.
NSE commenced trading in Index Futures on June 12, 2000. The NIFTY futures contracts are based on the popular market benchmark NIFTY 50 Index. NIFTY 50 is uniquely equipped as an index for the index futures market owing to (a) low market impact cost and (b) high hedging effectiveness. The good diversification of NIFTY 50 will generate low initial margin requirements. Finally, NIFTY 50 is calculated using NSE prices, and NSE is the most liquid exchange in India, thus making it easier to do arbitrage for NIFTY 50 index futures.
This can, indeed, be done. Is it worth doing? That depends upon the cost and benefit. Calculating the weights, in the ten stocks with the lowest market impact cost, so that the correlation with NIFTY 50 is maximised, is not easy to do. (See Risk structure of Indian stocks by Dr. John Blin of Advance Portfolio Technologies APT - http://www.aptltd.com for a calculation of a 10-stock portfolio which is maximally correlated with NIFTY 50. This is found in the book "The future of fund management in India" edited by Dr. Tushar Waghmare, "Invest India" - Tata McGraw Hill Series, 1997 - http://www.iief.com)
The gains from such an activity are not large. NIFTY 50 is explicitly designed to make it convenient to trade complete index portfolios. This is in contrast with other markets, where indices have arisen before index futures came about, and ways had to be found to trade them. For example, the 500 index was there before index futures came about. When index futures started trading, arbitrageurs had to find ways to trade the index - trading 500 stocks on the floor-based New York Stock Exchange was highly cumbersome. This led to great creativity in finding 250-stock portfolios which correlate well with the 500. In India, there is no need to undergo these kinds of problems. NIFTY 50 is the base of the index futures, and NIFTY 50 is designed to be convenient to trade directly.
Alternatives to the NIFTY 50
Every technical reason favours the NIFTY 50.
DiversificationNIFTY 50 is a more diversified index, accurately reflecting overall market conditions. The reward-to-risk ratio of NIFTY 50 is higher than other leading indices, making it a more attractive portfolio hence offering similar returns, but at lesser ri