Eleven non-F&O stocks are likely to be removed from the Nifty Next 50 index, if the exchange decides to tweak its computation methodology, according to Nuvama Institutional Equities.
These 11 stocks are Avenue Supermarts, Varun Beverages, Bajaj Holdings, Adani Green Energy, Zomato, Adani Transmission, Adani Total Gas, FSN E-Commerce Ventures, P&G Hygiene, LIC and Adani Wilmar.
Currently, these 11 stocks command 9.05 percent weight in the Nifty Next 50 index. Nifty Next 50 represents the next rung of liquid securities after the Nifty 50.
"The exposure of the index to non-F&O stocks frequently hitting the price bands, lowers the ability to replicate the index portfolio efficiently and thus increases the tracking error," according to Abhilash Pagaria, Head - Nuvama Alternative & Quantitative Research.
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To resolve this, NSE Indices has floated a discussion paper and proposed that only stocks traded in the futures and options (F&O) segment be part of the index.
"Having only those stocks that are available for F&O trading into the Nifty Next 50 index shall improve the ease of replication of the index by passive funds," Pagaria said.
This could be implemented in two phases. In the first phase, to be implemented on June 30, these 11 stocks will see a reduction in their weight. From 9.05 percent, the cumulative weight for the non F&O stocks will come down to 5 percent.
In the second phase, to be implemented on September 30, the stocks will be deleted and a new set will be added.
"As of now, this is just a consultation and final implementation could be announced by exchange by third week of June," added Pagaria.
In the case of deletion, the 11 stocks that stand to get entry to Nifty Next 50 are Shriram Finance, AU Small Finance Bank, Trent, Indian Hotels, TVS Motor Company, Cummins India, Jindal Steel and Power, Polycab, Punjab National Bank, Zydus Lifesciences and Abbott India.
Shriram Finance, AU Small Finance Bank, Trent and Indian Hotels could see over $40 million of inflow due to this, according to Nuvama's calculations. These changes are key to tracking as many exchange-traded funds and index funds are benchmarked to it.
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