You picked a price index fund. You learn concerning the technique. You favored the logic of shopping for low-cost shares, and also you invested for the long run.
After which, the index supplier revised its definition of “worth.”
No wrongdoing by anybody. Your fund tracked the index faithfully, precisely because it promised. But the combination of shares within the portfolio now appears fairly totally different from the one you obtain. Sounds unusual, doesn’t it?
Nevertheless, this could occur.
On this submit, allow us to have a look at a threat most traders by no means take into account after they purchase issue index funds. The danger that the index supplier adjustments the rulebook itself. We are going to use the Nifty 50 Worth 20 index for instance, after which see why plain market-cap indices largely escape this downside.
An element index is only a rulebook
A market-cap index solutions one easy query: how massive is the corporate? The Nifty 50 holds the 50 largest shares, weighted by free-float market cap. That’s primarily the entire rule.
An element index is totally different. It’s a recipe. Worth, momentum, high quality, low volatility, alpha, equal weight. Every is a algorithm that decides which shares qualify and the way a lot weight every will get.
And the index supplier owns that recipe and might revise it. And suppliers do revise, normally for sound causes (although you might not agree). To seize the issue higher. These adjustments are revealed within the methodology doc and the factsheet.
Your fund solely tracks the index. Therefore, when the recipe adjustments, your holdings change mechanically, with none motion from the fund supervisor, and with out you doing something.
What truly occurred to Nifty 50 Worth 20?
| Dimension | Previous methodology (Sep 2024) | New methodology (Jul 2026) |
| Worth components used | ROCE, PE, PB, Dividend Yield | Earnings/Worth (E/P), E book/Worth (B/P), Gross sales/Worth (S/P), Dividend Yield |
| Issue weighting | Rank-weighted 40% ROCE, 30% PE, 20% PB, 10% DY | Equal 0.25 every on E/P, B/P, S/P, DY |
| Choice methodology | Ordinal rank on every issue; ranks blended; high 20 by last rank | Z-score of every issue; weighted-average Z; high 20 by worth rating |
| Constituent weighting | Free-float market capitalization | Free-float market cap x worth rating |
| Reconstitution frequency | Annual, December solely | Semi-annual, June and December |
| Knowledge window for assessment | Reviewed in December (annual) | Six months ending Might and November |
| Capping realignment | 15% cap, realigned quarterly (Mar/Jun/Sep/Dec) | 15% cap, realigned semi-annually at rebalancing |
| Knowledge supply: NiftyIndices.com (Methodology doc) Disclaimer: The securities quoted are for illustration solely and usually are not recommendatory |
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Till not too long ago, this index chosen shares utilizing ROCE, PE, PB and dividend yield, with the biggest weight (40%) on ROCE. It was reviewed annually, in December.
The methodology has since been revised. ROCE is gone. The inventory choice now depends upon Earnings-to-Worth, E book-to-Worth, Gross sales-to-Worth and dividend yield, weighted equally.
Rebalancing occurs twice a 12 months, in June and December.
| Business | Might 2026 | June 2026 | Change (June – Might) |
| Banks | 40.60% | 46.26% | +5.66% |
| IT – Software program | 22.42% | 12.25% | -10.17% |
| Petroleum Merchandise | – | 12.47% | +12.47% |
| Vehicles | 9.08% | 3.49% | -5.59% |
| Energy | 7.71% | 5.15% | -2.56% |
| Diversified FMCG | 6.77% | 5.58% | -1.19% |
| Non – Ferrous Metals | 3.99% | 2.29% | -1.70% |
| Oil | 2.52% | 3.90% | +1.38% |
| Prescription drugs & Biotechnology | 3.88% | – | -3.88% |
| Consumable Fuels | 2.55% | 3.04% | +0.49% |
| Cement & Cement Merchandise | – | 1.99% | +1.99% |
| Ferrous Metals | – | 1.98% | +1.98% |
| Finance | – | 1.35% | +1.35% |
| Whole fairness | 99.52% | 99.75% | +0.23% |
| Supply: Month-to-month Portfolio Disclosures, Nippon AMC Disclaimer: The securities quoted are for illustration solely and usually are not recommendatory |
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Observe: I had a strategy doc downloaded in September 2024 that I used to match. Nevertheless, my understanding is that this modification in methodology occurred very not too long ago. The rebalance in June 2026 may be very seemingly the primary one with the new methodology.
The identify of the index didn’t change. What it holds did.
What could have prompted this modification?
I couldn’t discover any communication/documentation on NSE web site highlighting the explanations. Due to this fact, I don’t know what precisely prompted this modification.
The more than likely clarification is that the revised definition is nearer to the traditional definition of worth.
ROCE (Return on capital employed) is a top quality parameter and never worth. And with 40% weightage to ROCE, the outdated definition of Nifty 50 Worth 20 gave you publicity to High quality-Worth shares within the Nifty 50 area.
The truth is, ROCE could even be anti-value. An index with a better weightage to ROCE will structurally favour asset-light, excessive margin companies as a result of such corporations earn massive earnings on little or no employed capital. This may favour IT providers companies and FMCG. However this system works towards banks. The ROCE formulation doesn’t match a financial institution’s stability sheet. Deposits and borrowings are its uncooked materials, so its capital employed is large and the ratio comes out distorted. Furthermore, the markets pays extra for larger profitability. So, you may count on corporations with larger ROCE to commerce at larger valuations (and never decrease). Due to this fact, a good weightage to ROCE could also be diluting the “worth” sign of the index.
The revised definition focuses solely on Worth-to-Earnings, Worth-to-E book, Worth-to-Gross sales, and Dividend Yield. These are extra typical parameters of worth.
I can solely speculate about different causes. As an illustration, the index had underperformed not too long ago, and that underperformance may very well be attributed to its heavy weightage to IT shares. Many commentators additionally suppose IT shares will proceed to wrestle due to advances in Synthetic Intelligence. Beneath the outdated methodology, the index could have retained a better weightage to IT shares, and it’s potential the supplier needed to cut back that. However that is hypothesis on my half, and I might not learn an excessive amount of into it.
The index methodology has modified. Not a lot you are able to do about this. However there are classes and considerations right here too.
What if you happen to had chosen Nifty 50 Worth 20 index for publicity to quality-value shares?
In such a case, you might need to revisit your choice in such an index fund/ETF.
However there’s a greater downside. How would you come to know concerning the change in methodology?
Don’t count on NSE to speak this to everybody who has invested in an index fund/ETF monitoring such an index. It gained’t even have contact particulars of such traders.
The fund homes (AMCs) would have each items of knowledge. That the index methodology has modified. And AMCs even have contact particulars of traders. Did AMCs inform the traders? For my part, a proactive AMC must have flagged such a change to its traders.
I additionally stumbled upon this once I observed Nifty 50 Worth 20 index was not shifting up (as a lot) regardless of a pointy run-up in IT shares in July 2026. With larger publicity to IT shares (that I assumed it had), it ought to have gone up extra. After I dug deeper, I observed the sharp discount in allocation to IT shares. That’s what led me to have a look at the brand new methodology doc. The unlucky half is that the brand new doc doesn’t even point out how and when the methodology was modified.
Happily, I had an outdated Nifty Indices methodology doc downloaded on my system and I used that to match with the brand new methodology.
Furthermore, the previous efficiency of any index fund/ETF following NV20 index counts for little. As a result of the methodology has modified. The tactic that delivered outperformance (or underperformance) previously has modified. How do you belief the previous efficiency?
This isn’t too totally different from fund supervisor threat with energetic funds. With energetic funds, you’re uncovered to fashion drift, and there aren’t any crisp guidelines round inventory weightages. You merely belief the fund supervisor to do the fitting factor.
One may argue that issue funds remove such threat by way of a rule-based inventory choice and weighting methodology. Nevertheless, when the methodology itself can change, such consolation goes away.
And that is the place cap-based indices rating over issue funds and actively managed funds. Easy and constant methodology with little scope for change in guidelines. I’ve in contrast the two approaches (cap-based vs factor-based) from 2009 to 2025.
Do you have to keep away from investing in issue funds?
I depart this to your judgement.
Once you purchase an element index fund, you’re counting on a rulebook that another person maintains and might revise. A market-cap index carries nearly none of this threat. Its guidelines are goal and barely redefined. Sure, constituents get added or dropped, however no one wakes up and adjustments what “massive” means. Therefore, I favor a plain market-cap index for the core of an fairness portfolio. Issue index funds/ETFs may kind part of your satellite tv for pc fairness portfolio (similar to actively managed funds).
Whether or not to make use of such an element index product, which product to make use of, and the way a lot allocation to the product are your selections. It’s essential to base these selections in your threat profile and luxury/conviction in an element technique. Conviction is crucial as a result of any issue technique will undergo lengthy durations of underperformance that can take a look at your persistence. Contemplate such dangers whereas sizing your guess/allocation to issue merchandise. A method whose very definition can change shouldn’t be your largest holding.
And sure, as highlighted on this submit, hold checking the methodology regularly. It’s essential to revisit your choice to speculate if there’s a drastic change in index methodology.
Disclaimer: This isn’t a suggestion to speculate or not spend money on issue index merchandise. This isn’t a suggestion to speculate or not spend money on Nifty 50 Worth 20 Index funds/ETFs. Please do your homework and perceive the product correctly earlier than investing.
Disclaimer: Registration granted by SEBI, membership of BASL, and certification from NISM on no account assure efficiency of the middleman or present any assurance of returns to traders. Funding in securities market is topic to market dangers. Learn all of the associated paperwork rigorously earlier than investing.
This submit is for schooling goal alone and is NOT funding recommendation. This isn’t a suggestion to speculate or NOT spend money on any product. The securities, devices, or indices quoted are for illustration solely and usually are not recommendatory. My views could also be biased, and I could select to not deal with elements that you just take into account essential. Your monetary objectives could also be totally different. You might have a distinct threat profile. You could be in a distinct life stage than I’m in. Therefore, you will need to NOT base your funding selections based mostly on my writings. There is no such thing as a one-size-fits-all answer in investments. What could also be a superb funding for sure traders could NOT be good for others. And vice versa. Due to this fact, learn and perceive the product phrases and circumstances and take into account your threat profile, necessities, and suitability earlier than investing in any funding product or following an funding method.
