Too much weight on too few stocks? Gurmeet Chadha suggests broader metrics for index composition

As Indian fairness markets proceed to evolve, some imagine it is time to revisit the methodology behind index composition, notably in how weights are assigned to constituent shares. The dialog is gaining momentum amid considerations that present weightings overly favor a handful of large-cap names, doubtlessly resulting in manipulation by giant gamers in main indices just like the Nifty and Financial institution Nifty.

One such view was shared by funding skilled Gurmeet Chadha, Managing Accomplice & CIO, at Full Circle, who in a publish on X, argued that Indian indices have to rethink how weights and inclusions are decided.

“Indian indices ought to revisit methodology of index weights n inclusion. Aside from free float market cap , weight on GDP illustration could be added,” Chadha acknowledged.
He recommended that, other than free-float market capitalization, elements comparable to GDP illustration may be thought of within the weighting course of. Within the case of the Financial institution Nifty, he identified that two banks — HDFC and ICICI — collectively make up 53% of the index, which he described as “too lop-sided.”

He additionally proposed together with parts like guide worth for banks and order guide metrics for capital items corporations, to assist make indices extra balanced and inclusive.The publish drew consideration on X, with a number of customers chiming in with differing views on the proposal. One person recommended that as an alternative of relying solely on free-float market cap, every chosen firm within the index ought to be given equal weight. This, the person famous, would forestall giant corporations from dominating the index and assist guarantee a extra balanced distribution.One other person took a extra conventional stance, saying no modifications had been required in any respect. “Value is God, the final word fact,” the person wrote, including that whatever the underlying principle, technical, elementary, or astrological, outcomes will mirror within the value, and the present system will settle itself.

A special person proposed a extra radical strategy, suggesting the creation of a parallel index, a “Nifty 50 2.0”, as a testing floor for brand new methodologies, which may doubtlessly be merged with the principle index in the long term.

Additionally learn: Defence tech corporations can be a part of $500 billion membership in 5-8 years: Gurmeet Chadha

(Disclaimer: Suggestions, strategies, views and opinions given by the specialists are their very own. These don’t characterize the views of The Financial Instances)