What is Nifty - Importance, Index, Calculation and How to Invest

Nifty 50 is one of the benchmark indices that represents the Indian stock market globally. It consists of India's top 50 traded companies listed on the NSE and is the flagship of the NSE. Let's understand Nifty, how it is calculated, and how it works.

What is Nifty?

Nifty is the benchmark index of the National Stock Exchange (NSE). It comprises 50 top companies traded on the NSE based on free-float market capitalisation. Free float means shares are available for public purchase. The Nifty combines ‘National Stock Exchange’ and ‘Fifty’ in its name and it covers major sectors of the Indian economy and offers investment managers exposure to the Indian market under one efficient portfolio.

The Nifty also called the CNX Nifty or the Nifty 50, was launched in 1996 and managed by NSE Indices Limited, one of the NSE's subsidiaries. It is a popular barometer for evaluating the stock market's performance. For instance, if the stock market was up today, it usually means the Nifty 50 was up today.

The stocks that comprise the Nifty 50 are well-established companies with a global footprint, such as:

• HDFC Bank Ltd.
• ICICI Bank Ltd.
• Reliance Industries Ltd.
• Infosys Ltd.
• Bharti Airtel Ltd.
• Larsen & Toubro Ltd.
• ITC Ltd.
• Tata Consultancy Services Ltd.
• Axis Bank Ltd.
• Kotak Mahindra Bank Ltd.

How are Stocks Chosen for the Nifty 50 Index?

NSE ranks companies based on free-float market capitalisation. It then chooses the top 50 companies in the Nifty 50 Index. The following are the criteria for picking stocks for the Nifty 50:

• Stocks should have sufficient traded volume to ensure liquidity and broad investor participation. 
• Stocks should be available for trading in the Futures and Options (F&O) segment.
• Stocks should be listed on the stock exchange for six months. However, in the case of IPOs, stocks should have been listed for at least one month. 
• The company must be registered with the NSE and be domiciled within India, 
• The company should have a 100% trading frequency over the past six months.
• Companies with Differential Voting Rights (DVR) shares are eligible to be a part of the Nifty 50. 

The list of stocks is reviewed every six months. Those who don’t meet the criteria are eliminated from the Nifty 50. However, replacements are added from companies that match the NSE criteria.

The NSE intimates to the public at least four weeks before the changes are made. It is vital as financial products and baskets are built around possessing Nifty 50 stocks. Moreover, it gives time for baskets to realign their portfolios. 

Studies have shown that a stock price rises on the news of its inclusion in a stock market index. Moreover, the stock price may crash upon removal from the stock market index. In simple terms, the Nifty 50 weeds out stocks of non-performing companies from its portfolios while replacing them with solid performers.  

What are the Stocks Nifty 50 Holds?

Nifty 50 consists of the top 50 stocks which are trading on the NSE such as

Disclaimer: stocks are shown as of 24-03-2025, 
Source: NSE INDIA.

Types of NIFTY Indices

1. Benchmark Indices

Benchmark indices are the most well-known and widely followed indices in the Indian stock market. They act as the primary indicators of performance. 

• NIFTY 50: This is a representation of the leading 50 large and most actively traded stocks in 13 industries. It is a primary indicator for large-cap stock performance.
• NIFTY Next 50: It comprises the next 50 ranked companies immediately following the NIFTY 50, generally regarded as a gauge of potential large-cap stocks in the growth phase.

2. Broad Market Indices

These indices cover a much wider range of stocks based on their market value. They give you a more comprehensive view of the overall market beyond just the top performers.

• NIFTY 100/200/500: These track the top 100, 200, and 500 companies respectively, based on their market size and how easily their shares can be traded.
• NIFTY Total Market Index: This is the broadest index, encompassing all listed stocks that meet basic criteria for being included.

3. Sectoral/Thematic Indices

These indices are designed to track the performance of companies within a specific industry or business sector. They help investors understand and invest in trends unique to that industry.

• Examples: NIFTY Bank, NIFTY IT, NIFTY FMCG (Fast Moving Consumer Goods), NIFTY Pharma, NIFTY Auto, and more. Each of these includes the major companies operating within that particular sector.

4. Market Capitalisation-Based Indices

These indices specifically classify companies based on their size (market capitalisation). They help investors focus their investments on small, medium, or large-sized companies.

• Examples: NIFTY Midcap 100 (for medium-sized companies), NIFTY Smallcap 100 (for smaller companies), and NIFTY Microcap 250 (for very small companies).

5. Strategy Indices

These indices are built on specific investment strategies or "factors", using rules to select companies. They track portfolios designed to achieve certain investment goals.

• Examples:
  • NIFTY Low Volatility 50: Focuses on companies whose stock prices tend to fluctuate less.
  • NIFTY Alpha 50: Aims to capture stocks that have historically outperformed the market.
  • NIFTY Quality 30: Selects high-quality companies based on financial health.
  • NIFTY High Beta 50: Includes stocks that tend to move more dramatically than the overall market.

6. Fixed Income & Hybrid Indices

While most NIFTY indices deal with stocks, NSE also provides indices for bonds and other fixed-income investments, and even combinations of stocks and bonds.

• Examples: NIFTY SDL (State Development Loans) and NIFTY Bharat Bond Index (tracking public sector undertaking bonds). These help monitor the returns from debt instruments.

How is the Nifty Calculated?

Calculating the Nifty determines a company's market capitalisation. This involves multiplying the company’s share price with its equity. 

The equity capital is multiplied by the share price to calculate free-float market capitalisation. Moreover, whatever result you get must be multiplied by the IWF (Investable Weight Factor), which shows the share proportions traded by investors in the stock market. 

The Nifty is calculated using a base value of 1,000. The market value is divided by the base market capital multiplied by the base value of 1,000 to determine the daily index value of the Nifty. 

The formula for calculating the Nifty Index:

Market Capitalisation = Equity Capital * Share Price

Free float market capitalisation = Share Price * Equity Capital * Investable Weight Factor (IWF)

Index Value = Current Market Value / (1000 * Base Market Capital). 

The formula also determines changes in corporate action, such as rights issues, bonus issues, stock splits, etc. 

How Can You Invest in the Nifty 50?

You can invest in the Nifty 50 through Index Mutual Funds that track and replicate the Nifty 50 portfolio. It rises and falls in line with the Nifty 50. 

• Mutual funds
• ETF
• Investing in the same underlying stocks
• Derivatives
  • Options
  • Futures

However, you must pay attention to the tracking error, which is the deviation in the index funds' returns from the benchmark index, in this case, the Nifty 50. It is caused by the index mutual fund scheme's inability to buy and sell the index's underlying stocks. 

You can trade in the Nifty 50 stocks through Derivative Contracts like F&O (Futures and Options). It uses the index as an underlying asset where price fluctuations are linked to the Nifty 50 Index.  

Importance of Nifty

• Market Benchmark for Investors:

Nifty is a standard benchmark index that investors use to compare their portfolio performance against the market. This helps them track market trends to make informed investment decisions.

• Economic Health Indicator:

Nifty covers companies that are major contributors to the Indian economy. Its overall performance serves as an indicator of the country’s economic stability and outlook.

Major Milestones of NIFTY

Notable Highs in The History of Nifty

Notable Lows in The History of Nifty

What are the Factors that Cause Changes in the Nifty?

• Macroeconomic Indicators: 
  GDP growth, inflation, interest rates, and industrial output can set the the tone for investor sentiment and overall market direction.
• Corporate Earnings & Sector Performance:
  Strong or weak earnings from Nifty 50 companies, especially in major sectors like banking, IT, and energy can influence the movement of the index. 
• Global Influences:
  International events like Fed rate decisions, crude oil prices, geopolitical tensions, and foreign market trends directly impact the Nifty.
• Government Policies & Reforms: 
  Budget announcements, tax changes, or stimulus packages often influence market outlook and sectoral strength.
• Investor Activity (FII/DII Flows):
  Large-scale buying or selling by institutional investors affects market liquidity and index movement significantly.
• Market Sentiment & Unexpected Events:
  News cycles, speculation, pandemics, or wars can create sudden ups and downs, even when the fundamentals stay the same. 

The Nifty 50 is a benchmark index representing the top 50 companies on the NSE, offering broad exposure to India's economy. It is calculated based on free-float market capitalisation and reviewed every six months. Investors can access it through index mutual funds or derivative contracts. The index reflects the performance of key sectors, with changes driven by market conditions and corporate actions