Thousands of companies are listed on the NSE (National Stock Exchange), in such a case, if you have to find out how the stock market is moving, you can’t go ahead and check every company’s performance, right? Instead, a more feasible option would be to check the overall trends of the industry or sector and market sentiment towards the same. Here, sector means an area of the economy where businesses have the same or related business (activity, product or service).
What is a stock market index?
Indices are economic barometers that give us a sense of whether the economy is doing good or not. And a stock market index reflects the changes taking place in the market. Similar listed stocks from the same sector are grouped together to create an index. Popular benchmark (Oldest benchmark) indices in India are NIFTY (NSE) and SENSEX (BSE), while broad-based indices are NIFTY 50 and BSE 100. These stock market indices helps you in:
Monitoring the market’s pattern
Identifying trends of an industry
Taking investment decisions
Understanding the direction of our economy
What do you mean by sectoral indices?
While the NSE oversees whether the clearing members and the listed companies are abiding by the rules and regulations implemented by SEBI and the exchange. NSE Indices Limited, a subsidiary of NSE, provides these indices and index related services for the capital market. The company is responsible for NIFTY indices of NSE. It consists of broad-based indices, thematic indices, sectoral indices, customized indices and strategy indices.
The sectoral indices represent specific sectors and give benchmarking data of those sectors in the market. For the purpose of sectoral indices, various sectors identified are energy, healthcare, automobile, consumer products, technology & communications, and financial. Let’s understand this with an example – Bank NIFTY in NSE’s sectoral index represents the overall performance of the Indian banking sector. Sectoral indices are reviewed on a semi-annual basis ending January and July.
Types of NSE sectoral indices
The NSE share market is divided into 15 major sectors which are explained in the below table.
No. Of Constituents
Consists of manufacturers of cars, motorcycles, heavy vehicles, tyres and auto ancillaries
Liquid and Large Banks of India
Ascertains the benchmark that helps investors and market intermediaries review the capital market performance of the banks in India
NIFTY Financial Services
Banks, financial institutions, housing finance, insurance companies and other financial services companies
NIFTY Financial Services 25/50
Financial Industries (stocks that form a part of NIFTY Financial Services will be a part of this index at all times)
Individual stock’s weight should not be more than 25%
Average weight of all the stocks whose individual weight is 5% should not exceed 50%
Fast Moving Consumer Goods
Goods which are non-durable, massively consumed and available off the shelf
Stocks should be a part of Healthcare with macro-economic sector
Indian IT companies
Companies should be engaged in IT infrastructure, IT education, software training, networking infrastructure, software development, hardware, IT support & maintenance
Discontinued by NSE
Media & Entertainment
It includes media, entertainment printing and publishing industry
Includes metal as well as mining sector
Companies involved into manufacturing of pharmaceuticals
NIFTY Private Bank
Private Sector Banks
Bank’s trading frequency should be at least 90% in the last 6 months
NIFTY PSU Bank
Public Sector Banks
Banks that are traded (listed & traded and not listed but permitted to trade) at the NSE are eligible for inclusion in the index subject to fulfillment of selection criteria
Real Estate Companies
Primarily engaged into construction of residential as well as commercial properties
NIFTY Consumer Durables
Consumer Durables Industry
Manufacturers of home furnishings, consumer electronics, housewares and other such products
NIFTY Oil and Gas
Oil, Gas and Petroleum Industry
All the companies involved in manufacturing and extracting oil, gas and petrol
*No. of constituents in each sector are as on 27th December 2021
Eligibility criteria for the sectoral indices
The eligible universe for the companies to be considered for inclusion in NIFTY sectoral indices are:
Companies should be a part of NIFTY 500 at the time of review
Minimum 10 number of stocks should be within the index
If the number of eligible stocks falls below 10 from NIFTY 500, then the remaining number of stocks shall be taken from the universe of stocks ranked within the top 800. This selection will be done on the basis of average daily turnover and average daily full market capitalization of previous 6 months data that was used for index rebalancing of NIFTY 500
Final selection of the companies will be based on the free-float market capitalization after arranging them in the descending order
How can you as a retail investor trade in sectoral indices?
You can invest in any sectoral indice by purchasing Exchange-traded Funds (ETSs) or Index Mutual Funds. Your investment decision can depend on the prospective growth of that particular sector.
This segregation of markets into specific sectors helps investors carry out a detailed analysis of the economy and helps in understanding how the economy is performing and how a particular sector is performing. Apart from this, it also helps in setting up a benchmarking data for certain sectors or industries.