Nifty IT

Nifty IT Index

Nifty IT is a key sectoral index that shows us the performance of the top IT or information technology companies in India. The index is of special interest as it includes some of the most well-known, large-cap companies in the stock market such as Infosys, TCS, Wipro, HCL Tech, etc.

What is the Nifty IT?

NIFTY IT is a sectoral index on the National Stock Exchange (NSE) that captures the IT sector’s performance in the Indian economy. It is a real-time index of 10 tradable, exchange-listed IT stocks engaged in information technology.

The NIFTY IT index is owned and managed by NSE Indices Limited, previously known as India Index Services & Products Limited. The IT index is governed by a three-tier structure that comprises the Board of Directors of NSE Indices, the Index Advisory Committee and the Index Maintenance Sub-Committee.

The basic industries eligible to be included in the NIFTY IT index are the ones dealing with computer software and consulting, computer hardware & equipment, education, IT-enabled services, and software products.

NIFTY IT has a variant in the form of the NIFTY IT Total Returns Index. This index has practical applications for launching index funds, ETFs, and structured investment products, as well as for benchmarking fund portfolios.

How Is the Nifty IT Index Value Calculated?

The Nifty IT index is composed of multiple stocks of companies in India’s IT sector. The values of these shares are incorporated while calculating the index value of the Nifty IT. Based on these values, the index value of the Nifty IT is calculated as per the following formula:

Index Value = (Current Index Free Float Market Capitalisation / Base Free Float Market Capitalisation of Index) * Base Index Value

Where,

Index Free Float Market Capitalisation = Current shares outstanding * IWF * Capping factor * Price

[IWF = Investible Weight Factor i.e. the portion of the outstanding shares that is open to trading for the public on the exchange

Capping factor = 1 in case of uncapped indices]

The NIFTY IT index is reviewed semi-annually based on 6 months of data, with the cutoff date being January 31st and July 31st of each year. The replacement of stocks in NIFTY IT (if any) is implemented from the last trading day of March and September after giving four weeks prior notice to the market.

Selection Criteria for Scrips on the Nifty IT Index

The NIFTY IT index value is computed by weighing its 10 stocks on the basis of periodically capped free-float market capitalisation relative to a base market capitalisation value on a real-time basis.

To be included in Nifty IT, companies must be a part of the “Eligible Universe”. The eligible universe includes stocks that fulfil the following criteria:

1. The companies should be a part of Nifty 500 at the time of review.
2. The minimum number of stocks in the index should be 10.
3. If the number of eligible stocks within Nifty 500 ever falls below 10, then the remaining number of stocks shall be selected from the universe of top 800 stocks ranked based on both average daily turnover and average daily full market capitalisation. Both the numbers would be based on the previous 6 months' data used for rebalancing the Nifty 500. However, these ranked companies must have a minimum listing history of 6 months and 90% trading frequency in the previous 6 months.
4. Companies should form part of the IT sector universe.

How Are Stocks Selected for Inclusion in the Nifty IT?

The following is the process of choosing stocks to be added to Nifty IT:

1. First of all, the companies must be eligible under the above selection criteria for inclusion in the Nifty IT index.
2. The companies are then ranked in descending order as per their average free-float market capitalisation and the final selection of 10 companies is made based on the free-float market capitalisation to form part of the index. Preference shall be given to companies that are available for trading in NSE’s Futures & Options segment at the time of final selection.
3. Weightage shall be given to stocks such that no stock exceeds 33% weight in the index and the top 3 stocks are not more than 62% of the same.
4. Companies will be included if free-float market capitalisation is at least 1.5 times the free-float market capitalisation of the smallest index constituent in the respective index.

How To Invest in Nifty IT Stocks?

You can use the following methods to invest in the stocks that come under the Nifty IT Index:

1. You can invest in an ETF or exchange-traded fund that tracks the Nifty IT index. That way you can invest in all the stocks of the Nifty IT index via the NSE itself.
2. You can also invest in an index fund that tracks the Nifty IT index, i.e. it invests in a similar pattern in the same set of stocks as the index. This will allow you to directly benefit from the growth in the index’s value, via a fund managed by professionals.
3. You can also make a list of all the stocks that come under Nifty IT Index and buy those stocks in the same proportion as it is, in the index. However, you will have to keep track of all the different stocks yourself and rebalance them as per the index.

What Are the Benefits of Investing in the Nifty IT?

The following are some of the benefits of investing in the Nifty IT:

1. India has some of the top IT companies in the world serving both local and global clients. Therefore, the Nifty IT can also reflect this, allowing investors to benefit from capital appreciation if they invest in an index fund or ETF tracking the Nifty IT.
2. Many of these stocks are likely to have derivatives trading on them. Therefore, you have the opportunity to look through the trends in the stock’s derivative prices in order to make a more informed decision on whether to buy or sell the stock.
3. You can use futures and options on these stocks to combine with a regular stock trading or investing strategy in order to hedge your risks related to trading or investing in these stocks.

History of the Nifty IT Index

The index was launched with the base date as January 1st, 1996, and the base value at 1000, which was later revised to 100 with effect from May 28th, 2004, with capping at 33%. The index is reconstituted semi-annually.

Factors Affecting the Nifty IT Index

The following are some of the top factors affecting the Nifty IT Index value:

1. Monetary policy: The Nifty IT Index is sensitive to changes in monetary policy. When the RBI lowers interest rates, it makes it cheaper for IT businesses to borrow money, which can lead to increased investment and growth.
2. Government policies: Government policies can also have a significant impact on the Nifty IT Index. For example, policies that promote investment, innovation, technology-related research and education can help IT companies grow and compete globally in the long run.
3. Foreign investment: The flow of foreign investment into India can also affect the Nifty IT Index. When foreign investors buy Indian IT stocks, it can put upward pressure on prices, which can benefit small cap companies.
4. Economic growth: The overall health of the Indian economy is another important factor that can affect the Nifty IT Index. When the economy is growing, it creates more opportunities for IT companies to find more clients and customers.

It is important to note that these are just some of the factors that can affect the Nifty IT Index. The actual impact of any one factor can vary depending on the specific circumstances.