You picked a price index fund. You learn in regards to 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 seems fairly completely different from the one you obtain. Sounds unusual, doesn’t it?
Nonetheless, this may occur.
On this put up, allow us to have a look at a threat most buyers by no means think about once they purchase issue index funds. The danger that the index supplier adjustments the rulebook itself. We’ll use the Nifty 50 Worth 20 index for instance, after which see why plain market-cap indices largely escape this drawback.
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 completely 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 may revise it. And suppliers do revise, normally for sound causes (although you might not agree). To seize the issue higher. These adjustments are printed within the methodology doc and the factsheet.
Your fund solely tracks the index. Therefore, when the recipe adjustments, your holdings change robotically, with none motion from the fund supervisor, and with out you doing something.
What really occurred to Nifty 50 Worth 20?
| Dimension | Outdated methodology (Sep 2024) | New methodology (Jul 2026) |
| Worth elements used | ROCE, PE, PB, Dividend Yield | Earnings/Value (E/P), E book/Value (B/P), Gross sales/Value (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 closing 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 evaluation | Reviewed in December (annual) | Six months ending Could 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 aren’t recommendatory |
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Till just lately, this index chosen shares utilizing ROCE, PE, PB and dividend yield, with the most important weight (40%) on ROCE. It was reviewed yearly, in December.
The methodology has since been revised. ROCE is gone. The inventory choice now will depend on Earnings-to-Value, E book-to-Value, Gross sales-to-Value and dividend yield, weighted equally.
Rebalancing occurs twice a 12 months, in June and December.
| Business | Could 2026 | June 2026 | Change (June – Could) |
| Banks | 40.60% | 46.26% | +5.66% |
| IT – Software program | 22.42% | 12.25% | -10.17% |
| Petroleum Merchandise | – | 12.47% | +12.47% |
| Cars | 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% |
| Prescribed 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 aren’t recommendatory |
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Word: I had a technique doc downloaded in September 2024 that I used to match. Nonetheless, my understanding is that this alteration in methodology occurred very just lately. The rebalance in June 2026 could be very probably the primary one with the new methodology.
The title of the index didn’t change. What it holds did.
What might have prompted this alteration?
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 alteration.
The almost definitely rationalization is that the revised definition is nearer to the standard definition of worth.
ROCE (Return on capital employed) is a top quality parameter and never worth. And with 40% weightage to ROCE, the previous definition of Nifty 50 Worth 20 gave you publicity to High quality-Worth shares within the Nifty 50 area.
Actually, ROCE might even be anti-value. An index with the next weightage to ROCE will structurally favour asset-light, excessive margin companies as a result of such firms earn massive earnings on little or no employed capital. It will favour IT companies corporations and FMCG. However this system works in opposition to 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 can pay extra for greater profitability. So, you possibly can count on firms with greater ROCE to commerce at greater valuations (and never decrease). Due to this fact, an honest weightage to ROCE could also be diluting the “worth” sign of the index.
The revised definition focuses solely on Value-to-Earnings, Value-to-E book, Value-to-Gross sales, and Dividend Yield. These are extra typical parameters of worth.
I can solely speculate about different causes. As an example, the index had underperformed just lately, and that underperformance might be attributed to its heavy weightage to IT shares. Many commentators additionally assume IT shares will proceed to wrestle due to advances in Synthetic Intelligence. Below the previous methodology, the index might have retained the next weightage to IT shares, and it’s potential the supplier needed to scale back that. However that is hypothesis on my half, and I’d 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 when you had chosen Nifty 50 Worth 20 index for publicity to quality-value shares?
In such a case, you might wish to revisit your resolution in such an index fund/ETF.
However there’s a greater drawback. How would you come to know in regards to 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 received’t even have contact particulars of such buyers.
The fund homes (AMCs) would have each items of data. That the index methodology has modified. And AMCs even have contact particulars of buyers. Did AMCs inform the buyers? In my opinion, a proactive AMC should have flagged such a change to its buyers.
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 greater publicity to IT shares (that I believed 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 take 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 previous 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 strategy that delivered outperformance (or underperformance) previously has modified. How do you belief the previous efficiency?
This isn’t too completely 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 best factor.
One might argue that issue funds eradicate such threat via a rule-based inventory choice and weighting methodology. Nonetheless, 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.
Must you keep away from investing in issue funds?
I depart this to your judgement.
Whenever you purchase an element index fund, you’re counting on a rulebook that another person maintains and may revise. A market-cap index carries nearly none of this threat. Its guidelines are goal and infrequently redefined. Sure, constituents get added or dropped, however no person wakes up and adjustments what “massive” means. Therefore, I want a plain market-cap index for the core of an fairness portfolio. Issue index funds/ETFs might type part of your satellite tv for pc fairness portfolio (identical 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. You have 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 intervals of underperformance that may check your persistence. Contemplate such dangers whereas sizing your wager/allocation to issue merchandise. A technique whose very definition can change shouldn’t be your largest holding.
And sure, as highlighted on this put up, maintain checking the methodology frequently. You have to revisit your resolution to take a position if there’s a drastic change in index methodology.
Disclaimer: This isn’t a suggestion to take a position or not spend money on issue index merchandise. This isn’t a suggestion to take a position 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 by no means assure efficiency of the middleman or present any assurance of returns to buyers. Funding in securities market is topic to market dangers. Learn all of the associated paperwork rigorously earlier than investing.
This put up is for training function alone and is NOT funding recommendation. This isn’t a suggestion to take a position or NOT spend money on any product. The securities, devices, or indices quoted are for illustration solely and aren’t recommendatory. My views could also be biased, and I could select to not give attention to points that you just think about essential. Your monetary objectives could also be completely 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 isn’t any one-size-fits-all resolution in investments. What could also be a very good funding for sure buyers might NOT be good for others. And vice versa. Due to this fact, learn and perceive the product phrases and circumstances and think about your threat profile, necessities, and suitability earlier than investing in any funding product or following an funding strategy.