Understanding the Nifty Manufacturing Index: A Guide for Indian Investors

The manufacturing sector in India is making big strides, triggered by the country's steady march toward self-reliance and industrialisation. For investors interested in gaining exposure to this evolving theme, the Nifty Manufacturing Index can serve as a targeted benchmark, tracking the performance of publicly listed manufacturing companies. But what is this index? In this article, we will tell you everything you need to know about the Nifty Manufacturing Index, including how it is composed, its potential benefits, risks, and tax considerations to help you make an informed investment choice.

• Table of contents

• What is Nifty manufacturing index?
• How is the index put together?
• What makes up the index?
• Key features that define the index
• Sector representation within the index
• Performance and sector exposure
• Who qualifies for the index?
• Why consider investing in the Nifty manufacturing index?
• What to be mindful of?
• Taxation of Nifty manufacturing index

What is Nifty manufacturing index?

The Nifty Manufacturing Index is a thematic stock market index launched by the National Stock Exchange (NSE). This index tracks the performance of select manufacturing companies listed on the NSE. The Nifty Manufacturing Index acts as a measure of the overall performance of the manufacturing segment of India's equity markets.

However, unlike broad market indices like the Nifty 50, which include companies across diverse sectors, the Nifty Manufacturing Index offers a concentrated focus on manufacturing related businesses, making it suitable for investors looking to potentially capitalise on the sector’s anticipated growth.

How is the index put together?

The Nifty Manufacturing Index is constructed from the combined universe of the Nifty 100, Nifty Midcap 150, and Nifty Small Cap 50. Stock selection leans on six month average free-float market cap within industries that map the manufacturing economy. The list is refreshed twice a year (or semi-annually) to stay current with market dynamics.

What makes up the index?

The Nifty Manufacturing Index represents the manufacturing sector in a diversified manner. The portfolio includes businesses from the automobile, pharmaceuticals, metal producers, chemicals, capital goods, consumer durables, and other related sub-segment industries. It uses free-float market capitalisation weighting, which means the weight of each stock depends on its market value adjusted for the number of shares available for public trading. So, larger companies with more shares available to the public get higher weights.

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

Key features that define the index

• Manufacturing focus - The index focuses only on firms in the manufacturing sector.
• Broad market cap exposure - Broad exposure to large cap, mid cap as well as small cap firms.
• Scheduled maintenance - Semi-annual review and rebalancing ensures the basket is updated.
• Weight caps - The individual stock weight is capped at 5%, which also reduces concentration risk.

Sector representation within the index

The index is broadly diversified across various sub-segments of manufacturing. According to recent data, approximate weights are-

Performance and sector exposure

The Nifty Manufacturing Index has historically shown return potential in line with India’s industrial and economic cycles. Since its inception, it has reflected the broader manufacturing trend, benefitting from-

• Government initiatives
• Infrastructure development
• Recovery in global supply chains post-COVID

However, as a thematic index, its performance can be more cyclical than broader indices, influenced by factors like raw material costs, industrial policy, and global demand.

Read Also: SGX Nifty: Definition, Meaning, Advantages and Its Impacts

Who qualifies for the index?

To be included in the Nifty Manufacturing Index, a company must:

• Be listed on NSE and belong to the Nifty 100, mid cap 150, or small cap 50 universe.
• Belong to officially recognised manufacturing industries.
• Rank well by six month average free-float market cap within its industry.
• Make up ~75% of the float-adjusted market cap within its basic industry.
• Adhere to the 5% single stock cap.
• Honour minimum sector weights (example 20% for auto, capital goods).

Why consider investing in the Nifty manufacturing index?

Here are some potential benefits of investing in the index-

• Focused exposure to India’s manufacturing sector.
• Diversification across various industries within manufacturing.
• Transparent methodology, reviewed and published by NSE.
• ETF and index fund options, allowing passive participation.
• Aligned with India’s long-term growth potential and industrialisation efforts.

It may be suitable for long-term investors who believe in India’s growth efforts and want thematic exposure within a diversified portfolio.

What to be mindful of?

As with all equity products, the Nifty Manufacturing Index has its own risks:

• Sector concentration - Because it is thematic, it is not well diversified across sectors.
• Cyclical - Performance can swing with economic cycles and policies.
• Underperformance risk - Especially during economic slowdowns or commodity shocks.
• Limited flexibility – Index funds simply follow the index and don’t have any active management.

Investors should be aware that while there is potential for long-term wealth creation, there is no guarantee of returns.

Taxation of Nifty manufacturing index

If you invest via an index fund or a Nifty ETF that tracks the Nifty Manufacturing Index, it falls under the category of equity-oriented funds, provided at least 65% of its holdings are in equities or equity-related instruments as per SEBI norms. For these schemes, the applicable capital gains tax depends on how long you hold your investment and when you redeem it-

• Short-term capital gains (holding up to 12 months) - Taxed at 20% on gains realised after the holding period.
• Long-term capital gains (holding beyond 12 months) - Gains up to Rs. 1.25 lakh in a financial year are exempt, while any amount above that is taxed at 12.5%.

Conclusion

The Nifty Manufacturing Index provides focused and diversified exposure to India’s manufacturing sector through a transparent and rule-based structure. This thematic portfolio which supports manufacturing-led growth can be suitable for retail investors considering options such as an index fund or Nifty ETF. The Nifty Manufacturing Index may present tactical opportunities. However, investors should consider the large cap bias and concentrated exposure to sectors and also consider the sector itself on a cyclical basis. One should also consider whether the mutual fund or ETF makes sense for their long-term plans.

FAQs

What is NIFTY manufacturing index?

The Nifty Manufacturing Index is a thematic index launched by NSE to measure the performance of various top Indian manufacturing companies listed on the stock exchange.

What is meant by the NIFTY index?

The Nifty Index is a group of various indices that are provided by NSE which measure the performance of select listed Indian companies.

How many companies are part of the NIFTY Index?

Nifty includes many indices. For example, Nifty 50 has 50 large companies, while thematic indices like manufacturing have variable counts.

What is the objective of NIFTY India manufacturing?

The purpose of NIFTY India Manufacturing is to provide a benchmark for investors that reflects the performance of India's manufacturing sector. Provides investors a way to monitor and assess potential sector specific opportunities and risks.

What are NIFTY India manufacturing index stocks?

These are the approximately 76 manufacturing companies on NSE that meet certain eligibility criteria. The eligibility criteria are around revenue, liquidity, and market capitalisation.

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.