What is the Nifty Alpha 50 Index? How Does It Work? Should You Invest?

In this article, we will be discussing the Nifty Alpha 50 Index, what is it, and how it works. Should You Invest? Get all your answers about this Index in the article, so, let’s get started.

Nifty Alpha 50 Index:

The index aims to measure the performance of securities listed on NSE with high Alphas.
In order to make the 50 stocks index investible and replicable, criteria such as turnover and market capitalization are applied while a selection of securities.
Weights of securities in the index are assigned based on the alpha values.
Security with the highest alpha in the index gets the highest weight
The index is constructed using divisor methodology where weights are assigned based on alpha values of the securities.
The index can be used for a variety of purposes such as
- benchmarking fund portfolios,
- launching of index funds, ETFs and
- structured products.
Nifty Alpha consists of a maximum of 50 stocks listed on the NSE
Index values are calculated on a real-time basis
Index rebalancing is done Quarterly using data from six month period ending the last trading day of February, May, August, and November.

Selection Criteria:

For Inclusion: The company must be domiciled in India and traded at NSE to be eligible for inclusion in the NIFTY indices
For Exclusion: Convertible stock, bonds, warrants, rights, and preferred stock that provide a guaranteed fixed return, stocks under suspension, and stocks categorized under the BZ series are not eligible for inclusion in the NIFTY indices
Companies must rank within the top 300 companies by average free-float market capitalization and average daily turnover for the last six months ending February, May, August, and November
They should have a minimum listing history of 1 year.
The company’s trading frequency should be 100% in the last one-year period.
Alphas of eligible securities are calculated using 1-year trailing prices (Adjusted for corporate actions) and ranked in descending order 8.
The top 50 securities with the highest alphas form part of the index
To reduce the replacements of scrips in the index, a buffer of 100% shall be applied at the time of each review. This means that if the existing constituent at the time of the review ranks within the top 100, the same can be retained in the index 10.
Scrips having negative alpha are not considered for selection. However, an existing constituent having negative alpha would be retained in the index if no scrip having a positive alpha forms part of the eligible pool

Reconstitution & Rebalancing:

Rebalancing is done quarterly: Feb, May, Aug, and Nov and it is effective from Mar, Jun, Sep, and Nov
At the time of index reconstitution, a company that has undergone a scheme of arrangement for a corporate event such as spin-off, capital restructuring, etc. is considered eligible for inclusion in the index
All indices are reconstituted at pre-defined periodicity. Additional index reconstitution may take place in case
- If an index constituent undergoes a merger, spin-off, delisting, specific cases of restructuring which may affect share prices
- If the index constituent is moved to BZ/ SZ series
- If the index constituent is removed from the F&O segment
- If security is suspended for trading from the capital market or SME Emerge
- If there are adverse regulatory findings or order/governance-related issues
In case of a merger, spin-off, capital restructuring, or voluntary delisting, equity shareholders’ approval is considered as a trigger to initiate replacement through additional index reconstitution.

Recent Changes- June 2022:

Index Constituents:

The Top-10 Stocks constituents 41.5% and Top-25 stocks constituents 74.3%.

Sector Allocation:

This Index is having highest allocation to the Financial Sector i.e., 13.7% which is followed by the Communication Sector which is having an allocation of 12.3% of the index. The fund is having least allocation of 1.3% in the Consumer Durable sector.

Returns:

Calendar year returns are above category average for 5 out of 10 times. For the rest of the period, the returns of the index are at par average mostly. In 2016 and 2018, the index generated a negative return of 9% and 14% respectively.

Trailing returns have remained higher than category average and benchmark index in all the periods except for 1-year.

In terms of Rolling Return too, in every factor, the Nifty Alpha 50 Index has outperformed the category average in every case.

Risk Ratio:

The standard deviation of this index is around 28% whereas the standard deviation of the Nifty 500 is around 23%.
The beta of this index is around 1.
The index has also generated Alpha quite very well. PE is more than Nifty 500.

How to invest in this index?

There is only 1 option available to invest in this index:

What should investors do?

Overall, this Index Fund/ETFs has performed very well as compared Nifty 500 index. It is Index/ETF focused on Nifty Alpha 50 stocks that too with a quite risky investing approach and hence investors with a high-risk appetite can keep this index on their radar, one can choose it according to their risk-taking appetite and return expectation.

Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.