Last Updated on August 22, 2022 at 11:11 pm
A reader asks, “Should investors look to reduce/eliminate exposure to Nifty Next 50 because the NSE has recently changed its inclusion criterion that has allowed new companies like Paytm (One 97 Communications Ltd.), Zomato and Nykaa (FSN E-Commerce Ventures Ltd. ) to be part of the index from March 31st 2022?”
On Feb 24th 2022, the NSE announced that the “Minimum listing
history requirement in case of a new listing and companies traded subsequent to the scheme of arrangement for corporate events” was revised from three months to one month”
First of all, this rule applies to all NSE indices and not just Nifty Next 50. Second of all, if the rule had not been changed, Zomato and Paytm would have been included in the next index rejig and they are unlikely to be profitable even then!
Third of all and perhaps the most important takeaway in this is: while active funds are subject to fund manager risk, passive funds are subject to curator risk. Nothing emphasises this better than this guest article: Data Mining in Index Construction: Why Investors need to be cautious.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
The data mining reference applies more to factor indices than to capitalization-weighted indices. For example, today if you look at a factor index like momentum or alpha or quality or low volatility, everything looks hunky-dory. If the future pans out differently, the index curator can happily change the selection rules.
The moral is, the powers that control the stock market keep changing the rules. A debate on whether the change is justified or not is a useless pursuit. The point is, investors, cannot run from selection risks!
For example, in Aug 2019, NSE changed the selection criteria from “only those equity shares that were listed and traded on the exchange were eligible for inclusion in the Nifty indices” to “all equity shares that are traded (listed and traded and not listed but permitted to trade) at the exchange are eligible for inclusion in the Nifty indices,”.
If the NSE site was a bit more user-friendly it would be easy to fish out several such circulars from their archive. I completely agree with the reader that all this leaves a bad taste in the mouth.
I am not too worried about the inclusion of Paytm or Zomato. I don’t think these two companies on their own can bring down Nifty Next 50 returns. The index can do that on its own quite well!
Note: Some readers seem to have misinterpreted our recent article – Is it time to exit from Nifty Next 50? – as a call to exit the index. That is not the case. Yes, when compared to Nifty 50, NN50 has done poorly and we had only urged readers to question if they would like to wait or not.
Not all our calls go right and we must review from time to time and make a call without regret. We have also shown (after the publication of the above article) that the Nifty Next 50 still remains a good mid cap passive fund although a frustrating one: Axis Nifty Midcap 50 Index fund Review.
So, Paytm/Zomato or no Paytm/Zomato, the character of Nifty Next 50 is unlikely to change. It is going to go through periods of no returns and sudden booms. Only those for whom patience is suitable (for their needs) should consider it. There is no need to reconsider investing in NN50 because of the recent changes in the index inclusion criterion. Not much is going to change. Tomorrow there could be loss-makers in the Nifty or Sensex too. This does not mean active funds will do better.
There are of course several deep questions here.
- Should SEBI allow loss-making companies to list?
- Should indices include loss-making companies?
- If loss-making companies are included in the index will their value not be artificially inflated?
We do not have answers or even opinions on this (they are of little value anyway). We are however reminded of this exchange from the movie Margin Call (the contexts are different though).
Sam Rogers: The real question is: who are we selling this to?
John Tuld: The same people we’ve been selling it to for the last two years, and whoever else ever would buy it.
Sam Rogers: But John, if you do this, you will kill the market for years. It’s over.
Sam Rogers: And you’re selling something that you *know* has no value.
John Tuld: We are selling to willing buyers at the current fair market price.
At the end of the day, that is all there is to it – the current fair market price. Does not matter how the underlying business is doing. If # of buyers > # of sellers, the price moves up. If it is the opposite, the price falls. One cannot expect both decisions (buy/sell) to be logical!
Whether it is an active mutual fund or a passive mutual fund, we recommend investors treat them as black boxes with a label (the NAV). If we open the box and look into the portfolio, we will always find something to be unhappy with. It is an unproductive occupation and is best avoided.
It is best to treat the risk and reward of a mutual fund at the NAV level and not fret about things we cannot control. Who knows how the future will pan out! Today’s loss-makers maybe tomorrow’s giants or vice-versa!
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)