Nifty India Manufacturing Index

What is the Nifty India Manufacturing Index?

The Nifty India Manufacturing Index, or NIMI for short, is a crucial barometer for the performance of India’s manufacturing sector. It tracks a handpicked list of manufacturing stocks from a combined universe that includes the Nifty 100, Nifty Midcap 150, and Nifty Smallcap 50 indices.

In simpler terms, think of it as a leaderboard for the manufacturing champs of India, featuring everyone from the giants to the mid-sized and small players, all vying for the top spot.

Modi’s Master Plan: Making India the Global Manufacturing Hotspot

Enter Prime Minister Narendra Modi, the modern-day cheerleader for the Indian economy, rallying businesses with the “Make in India” initiative. It’s like he’s standing on a mountaintop, shouting, “India, let’s bring back the manufacturing mojo!”

To make this vision a reality, the government has rolled out a red carpet of policy reforms. From slashing corporate tax rates to streamlining labor laws, they’re making it easier for businesses to set up shop faster than you can say “GST” (and that’s no small feat, believe me). They’re even talking about a single-window clearance system for industrial approvals, which is like moving from a traffic jam to an express highway.

How Is the Nifty India Manufacturing Index Calculated?

Index Methodology: A Simplified Guide

The Nifty India Manufacturing Index (NIMI) is a specialized index designed to track the performance of select companies within the Indian manufacturing sector. The stocks eligible for inclusion in NIMI are drawn from the combined pool of the Nifty 100, Nifty Midcap 150, and Nifty Smallcap 50 indices, focusing on those that belong to core manufacturing industries. The selection process is guided by the following key principles and criteria to ensure a comprehensive and representative reflection of the manufacturing sector.

Key Features

1. Historical Base: The index was established with a base date of April 1, 2005, and a base value of 1000. This provides a historical perspective and a consistent point of reference for tracking the performance of the manufacturing sector over time.
2. Eligibility Universe: Stocks eligible for inclusion must be part of the Nifty 100, Nifty Midcap 150, or Nifty Smallcap 50 at the time of review. This ensures a mix of large, mid, and small-cap companies, providing a balanced view of the sector.
3. Industry Focus: Only companies from eligible manufacturing industries, as classified by the Association of Mutual Funds in India (AMFI), are considered. This focused approach ensures that the index accurately represents the manufacturing sector.
4. Coverage and Weighting: The index aims to cover approximately 75% of the free-float market capitalization of eligible stocks within each manufacturing industry from the combined pool. Stock weights are determined based on their free-float market capitalization, with a maximum cap of 5% per stock to prevent any single company from dominating the index.
5. Sector Weighting: To ensure diversification, key sectors like Automobile and Auto Components, and Capital Goods must each have a minimum weight of 20%. This prevents the index from being overly concentrated in a few sectors and provides a broader view of the manufacturing landscape.
6. Regular Rebalancing: The index is reviewed and rebalanced semi-annually, in March and September, to keep it aligned with market dynamics and ensure it remains up-to-date.

Eligibility Criteria

Stock Selection Universe:

• Stocks must be part of the Nifty 100, Nifty Midcap 150, or Nifty Smallcap 50 indices.
• Only ordinary equity shares are considered for inclusion.

Stock Selection Process: The selection of stocks follows a structured three-step process:

1. Selection from Nifty 100: Initially, eligible stocks from the Nifty 100 are selected.
2. Additional Selection from Midcap and Smallcap: If the selected stocks from Nifty 100 do not provide 75% coverage of the free-float market capitalization within their basic industries, additional stocks are selected from the Nifty Midcap 150 and Nifty Smallcap 50. These stocks are sorted in descending order of their 6-month average free-float market capitalization until the cumulative 75% coverage is achieved.
3. Inclusion and Weighting: The weights of the selected stocks are then calculated based on their free-float market capitalization, with individual stock weights capped at 5%.

Weights and Capping

• The weight of each stock in the index is determined by its free-float market capitalization.
• Key sectors like Automobiles and Auto Components, and Capital Goods are required to have a minimum weight of 20% each, ensuring sectoral balance.
• No single stock can exceed a weight of 5% to maintain a balanced index composition.

Reconstitution and Rebalancing

• Semi-Annual Reviews: The index undergoes reconstitution and rebalancing semi-annually, in March and September, in line with the broader Nifty indices. This process uses the 6-month average free-float market capitalization data up to January and July, respectively.
• Ad-Hoc Adjustments: In addition to the regular reviews, ad-hoc reconstitution may occur if any constituent stock faces suspension, delisting, or undergoes significant corporate actions such as mergers or splits.
• Quarterly Compliance Check: To adhere to the Securities and Exchange Board of India (SEBI) norms for portfolio concentration in ETFs and index funds, the index is screened quarterly. This ensures that it complies with regulations and maintains a diversified risk profile.

Why This Matters

The meticulous selection and weighting process of the Nifty India Manufacturing Index ensures that it accurately reflects the performance and trends of India’s manufacturing sector. By focusing on a broad representation of core manufacturing industries, the index provides investors with a comprehensive tool to gauge sector performance and make informed investment decisions. Its regular reviews and adherence to strict eligibility criteria ensure that it remains relevant and aligned with the evolving market dynamics. Whether you’re an investor, a policymaker, or just someone interested in the manufacturing sector, understanding the Nifty India Manufacturing Index can provide valuable insights into the health and potential of this vital economic segment.

Governance of the Nifty India Manufacturing Index:

You might be curious about who’s steering this financial ship. The Nifty India Manufacturing Index is governed by a three-tier structure that would make even the most bureaucratic institutions jealous. At the top is the Board of Directors of NSE Indices Limited, followed by an Index Advisory Committee and an Index Maintenance Sub-Committee.

These entities ensure the index is managed with integrity and professionalism, avoiding any mishaps that could give investors a major headache.

Index Constituents: The Star Players

Let’s take a closer look at the all-stars of the Nifty India Manufacturing Index. These are the companies that make the cut and contribute to the index’s performance. Think of them as the MVPs (Most Valuable Players) of the Indian manufacturing league:

These companies are the crème de la crème, representing a wide array of sectors from auto manufacturers to chemicals, pharmaceuticals, and metals & mining. This diversity ensures that the index isn’t just a one-trick pony but a robust and comprehensive reflection of India’s manufacturing prowess.

How to invest in Nifty India Manufacturing Index?

You can invest in Nifty India Manufacturing Index with both Mutual Funds and ETFs.

Nifty Manufacturing Index Fund ETFs are:

• Mirae Asset Nifty India Manufacturing ETF

Nifty India Manufacturing Index Mutual funds are:

• Navi Nifty India Manufacturing Index fund
• Mirae Asset Nifty India Manufacturing ETF FoF

Index Methodology: The Selection Saga

Now, how do stocks get the coveted spot in the Nifty India Manufacturing Index? It’s not as simple as drawing names out of a hat at a corporate bingo night. The process is meticulously crafted to ensure that only the most deserving stocks make the cut. Here’s a glimpse into the methodology:

1. Eligibility Criteria: To be considered for inclusion, a stock must be part of the Nifty 100, Nifty Midcap 150, or Nifty Smallcap 50 indices. This ensures that only the established and significant players are considered, providing a mix of large, mid, and small-cap companies.
2. Sector Representation: The index aims for a balanced representation across various manufacturing sectors. This means no single sector can dominate, ensuring a diverse and comprehensive view of the manufacturing landscape.
3. Liquidity and Market Capitalization: Stocks must have a robust trading volume and market capitalization. This means they need to be actively traded and hold significant market value, ensuring they have enough liquidity and aren’t just flashes in the pan.
4. Weightage Cap: To avoid over-dependence on a single company, no stock can have more than a 5% weightage in the index. This helps in maintaining a balanced index where no single player calls all the shots.
5. Regular Reviews: The index undergoes a semi-annual review where stocks are evaluated, added, or removed based on their performance and adherence to the inclusion criteria. This ensures that the index remains relevant and up-to-date with the latest market conditions.

Performance Compared to Nifty 50 and Nifty 500

When it comes to measuring up against the heavyweights like Nifty 50 and Nifty 500, the Nifty India Manufacturing Index (NIMI) brings a unique flavor to the table. Unlike the Nifty 50, which focuses on the top 50 companies across various sectors, and the Nifty 500, which includes a broader array of 500 companies spanning almost the entire market spectrum, NIMI zeroes in specifically on the manufacturing sector. This targeted approach often results in a more volatile performance profile, given its susceptibility to sector-specific trends and global manufacturing dynamics.

Take, for instance, the period between 2020 and 2022 when the “Make in India” initiative was in full swing. During this time, the NIMI delivered an impressive 40% return, significantly outpacing the Nifty 50’s 25% and the Nifty 500’s 27%​​​​. This surge was driven by robust growth in the manufacturing sector, buoyed by favorable policies and increased domestic and international demand for Indian-made goods.

However, the flip side of this coin became evident during economic downturns like the global financial crisis of 2008 or the pandemic-induced slowdown of 2020. During these turbulent times, the NIMI’s heavy concentration in manufacturing caused it to underperform its more diversified counterparts. For instance, in the 2020 market crash, NIMI plummeted by 30%, while the Nifty 50 and Nifty 500 saw relatively milder declines of 20% and 22%, respectively​​​​. This makes the NIMI an exciting, albeit riskier, option for investors looking to capitalize on the manufacturing sector’s growth during booms, while also highlighting the broader safety nets provided by the Nifty 50 and Nifty 500 during market downturns.

In Conclusion: Why You Should Care About the Nifty India Manufacturing Index?

The Nifty India Manufacturing Index isn’t just a collection of numbers and fancy financial terms. It’s a vital tool for investors, policymakers, and anyone interested in the economic pulse of India. Whether you’re planning to invest, study the market, or just sound smart at your next dinner party, understanding this index gives you a leg up.

So, the next time someone asks you about the Nifty India Manufacturing Index, you can confidently tell them it’s like the all-star roster of Indian manufacturing, backed by solid governance and driven by Modi’s vision of making India a global manufacturing powerhouse.