Understanding the Nifty IT index

As an investor, it is essential to understand what stock market indices are. These are statistical instruments to analyse the performance of a group of stocks, which determine how a particular market segment, or the market as a whole, has fared. One of the prominent index in India is the Nifty IT Index.

Nifty IT Index represents the Information Technology sector performance and we all know in today’s time and age how vast and economically important this sector is.

This article will explain everything about Nifty IT Index – its features, how it is calculated, selection criteria, and its potential benefits. We also discuss suitable investing strategies and the factors that affect this index.

• Table of contents

• Nifty IT index simplified
• Key features of Nifty IT index
• Calculation of Nifty IT index value
• Selection criteria for the Nifty IT index
• Potential benefits of investing in the Nifty IT
• Ways to invest in Nifty IT
• 5 things to know before investing in the Nifty IT index
• Factors affecting the Nifty IT index

Nifty IT index simplified

The National Stock Exchange launched Nifty IT Index as a sectoral index that tracks the performance of listed IT companies in India. It typically consists of 10 companies that are involved in activities such as software development, IT consulting and system integration.

Just as other indices do for the respective sectors they track, Nifty IT represents the leading 10 companies in the IT sector and their performance on the stock exchange. If these companies and the overall IT sector are performing well, the index goes up, and if they are facing challenges, it goes down.

Read Also: What is Nifty: Meaning, Eligibility, Calculation and Benefits

Key features of Nifty IT index

• Sector specific: Unlike other broader indices like Nifty 50, Nifty IT Index only includes IT companies.
• Weightage: The index is calculated using the free-float market capitalisation method. Larger companies with higher market capitalisation have greater weight in the index.
• Review frequency: The index is reviewed and rebalanced semi-annually to ensure it remains updated with market changes.

Calculation of Nifty IT index value

The Nifty IT Index is calculated using the free-float market capitalisation method. This means that only the shares available for public trading are counted, making the index a true reflection of real market trends.

The formula is:

Index value = (Total free-float market capitalisation of all stocks / Base market capitalisation) x Base index value

Here’s what that means in simple terms:

• Market capitalisation: Multiply a company’s share price by the number of shares available for trading.
• Base market capitalisation: The total market cap of the index’s stocks on the base date, used as a fixed reference point for comparison.
• Index adjustment: The index is adjusted whenever events like stock splits, bonuses or other corporate changes happen.

Since the IT sector keeps evolving, the index is reviewed from time to time to make sure it always represents the industry accurately.

Read Also: What Is Nifty Midcap 150 And How Do You Invest In It?

Selection criteria for the Nifty IT index

• Listing on NSE: The company must be listed on the NSE and be a part of Nifty 500 at the time of review.
• Sector classification: Only companies classified under the IT sector are eligible.
• Minimum stocks: The number of stocks in the index should be 10.
• Liquidity: The company’s stock must be highly liquid and actively traded.
• Market capitalisation: It must have a relatively higher free-float market cap compared to peers.
• Eligibility checks: Companies are reviewed periodically and if they fail to meet the requirements, they may be removed.

Potential benefits of investing in the Nifty IT

• Sectoral exposure: Investors gain access to the entire IT sector through a single investment.
• Diversification within IT: Instead of relying on one company, the index spreads investments across multiple IT firms.
• Benchmarking: Investors can compare the performance of their IT-related investments with the index.
• Growth potential of IT sector: The IT industry has global demand, which may potentially provide long-term potential growth opportunities.

Ways to invest in Nifty IT

Investors cannot directly buy the Nifty IT Index, but they can invest in products linked to it. These methods include:

• Individual stocks: Buying shares of the companies that are part of the Nifty IT Index.
• Index funds: Mutual funds that replicate the performance of Nifty IT Index, subject to tracking error.
• Exchange traded funds (ETFs): Traded on stock exchanges, these aim to mirror the index’s performance.
• Derivatives: Futures and options contracts based on Nifty IT are also available for trading.

While these are some ways to invest in Nifty IT, it is also important to keep in mind that each option has its own risks and potential benefits. For example, ETFs are traded like shares and may provide higher liquidity, while mutual may be suitable for investors with a long-term investment horizon.

5 things to know before investing in the Nifty IT index

• Since it focuses only on IT, any downturn in the industry may impact the index.
• The index is calculated using the free-float market capitalisation method. Larger companies with higher market capitalisation have greater weight in the index.
• Investment in Nifty IT Index can be done through individual stocks, index funds, ETFs, or derivatives.
• Check if your investments are meeting your goals, and adjust your portfolio if needed.
• Understanding technology well can help, but it’s not necessary to invest in the Nifty IT sector.

Factors affecting the Nifty IT index

Here are factors that can affect the value and performance of the Nifty IT Index:

• Monetary policy: RBI’s interest rate cuts lower borrowing costs, encouraging IT companies to invest and expand.

• Government policies: Initiatives promoting innovation, research, education and technology boost long-term potential growth and global competitiveness of Indian IT firms.
• Foreign investment: Inflows from foreign investors increase demand for IT stocks, pushing prices higher and often potentially benefitting Indian tech companies.
• Economic growth: A strong Indian economy creates new business opportunities, helping IT firms attract more clients and drive revenue.

Conclusion

The Nifty IT Index provides an overall idea about the performance of leading IT companies in India. It acts as a benchmark for the sector and helps investors understand trends and opportunities. Investing in Nifty IT can be done through ETFs, index funds or derivatives, but the decision depends on individual goals and risk appetite. Like all market-linked investments, careful research and diversification are important.

FAQs:

Is there any Nifty IT Index?

Yes, the Nifty IT Index exists and tracks the performance of listed IT companies on the NSE.

What is NIFTY called?

NIFTY stands for National Stock Exchange Fifty. It represents the 50 largest companies listed on NSE.

Are there NIFTY IT options?

Yes, derivatives such as futures and options contracts are available on the Nifty IT Index.

How many companies are in NIFTY IT?

Currently, the Nifty IT Index includes 10 companies.

How can I buy NIFTY IT?

Investors may invest through individual stocks, ETFs, mutual funds or trade in Nifty IT derivatives.

What is the objective of NIFTY IT?

Its objective is to reflect the performance of companies in the IT sector.

How can I stay updated on Nifty IT sector performance?

You can follow updates on NSE’s official website, financial newspapers and other investment portals.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.

The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Ltd. does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed.The tax information (if any) in this article is based on current laws and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.