Nifty 50 Constituents Change...Once Again

Last week the changes in National Stock Exchange's (NSE) benchmark index Nifty 50 came in to effect. NSE added Bajaj Finance, Hindustan Petroleum, UPL Ltd to Nifty 50. And, removed ACC Ltd, Bank of Baroda, Tata Power, and Tata Motors DVR from the index.

With these changes, the Nifty 50 index, once again, comprises of 50 stocks. The exchange had added Tata Motors DVR to the index last year, taking the total count up to 51.

There has been a total of 180 changes in Nifty 50 index since its inception. Ninety stocks have been included and ninety others were excluded. The weightages of stocks also keep on changing frequently.

The constituents and their weightages have gone through significant changes since the beginning. So, is the benchmark Nifty still the same? Would it make sense to look at the long-term charts and patterns of the index, if its constituents are different from what it was earlier?

I have elucidated this paradox with an analogy from Greek mythology to explain this concept in the following article. Read on and share your views.

Ship of Theseus

Apurva Sheth

In ancient Greece, there was a legendary king named Theseus who supposedly founded the city of Athens. Since he fought many naval battles, the people of Athens dedicated a memorial in his honor by preserving his ship at the port.

This 'Ship of Theseus' stayed there for hundreds of years. As time went on, some of the wooden planks of Theseus' ship started to rot away. To keep the ship nice and complete, the rotting planks were replaced with new planks made of the same material.

After some years, all the original planks were rotten and replaced by new ones. Here is the key question:

If you replace all the original planks with newer ones, is it still the same ship of Theseus?

This is the Paradox of the ship of Theseus. It refers to an object that over time has all of its pieces replaced. Is such an object still the original or is it an entirely new one?

If it's a new object, then when does the transformation take place? Does replacing the first piece change the identity of the object or does it remain the same until the last piece is replaced?

Before you answer that, let me add another twist to the tale.

What if, instead of throwing the old pieces away, we would have used the same rotten planks to build another ship? Which one would we call the ship of Theseus?

There can't be two ship of Theseus. So which one would you call Theseus' ship and why?

For thousands of years, philosophers have given their views on this question. But there isn't a black or white answer to this. And that's why it remains a paradox.

Why am I talking about this today?

I have observed a similar paradox in stock markets as well.

The benchmark indices that we track so regularly are similar to Theseus' ship. Both benchmark indices, the Nifty and the Sensex, have gone through significant changes since their inception.

Many companies that were a part of the index 10 or 20 years ago are not a part of it anymore. Some companies have ceased to exist or have fallen out of favour. For example, companies such as Ballarpur Industries, GE Shipping, and Indian Hotels were a part of the Sensex in 1995. These companies are rarely spoken of today, but they were once market favourites.

The Nifty 50 index, launched in 1999, has changed significantly. Eighty companies were included, and eighty others have been excluded till date. The weightings of the stocks in the index change on a regular basis.

If the underlying constituents and their weightings have changed significantly since inception, then is the Sensex or Nifty still the same? Would it make sense to look at the long-term charts and patterns of these indices?

I think we should.

Despite so many inclusions and exclusions in both benchmark indices through the years, the concepts of technical analysis remain applicable.

The Sensex hit a high of 21,000 in 2008. This high acted as a resistance in 2010 and in 2013 as well. This was despite the fact that the constituents of Sensex had changed significantly over this period.

The Sensex and Nifty aren't just aggregates of constituents. They're much more than that.

The benchmark Indices are a reflection of the greed and fear of market participants.

A big down day on the benchmark instills fear, and a big up day promotes optimism. The constituents of the index do not matter. What matters is how people react to different developments in the market.

The ship of Theseus may be made of wooden planks. But that is not what inspires people. It is the people's faith in the ship that inspires them to dream and be adventurous. Similarly, the constituents of the indices do not make the indices what they are. It is the market participant's faith in the indices that matters.

A lot of people think of the benchmark indices as a true reflection of markets. And until people stop believing this, the benchmark indices will remain relevant irrespective of the changing constituents.

Meanwhile, the BSE announced two changes to the Sensex yesterday. Hindalco and Vedanta will exit, and Asian Paints and Adani Ports will replace them very soon.

Do you think these changes will affect people's perception of the Sensex?

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4 Responses to "Nifty 50 Constituents Change...Once Again"
09 Oct, 2017
Financial markets has many components, Multiple stocks, multiple bonds, multiple currencies and therefore to get an indication of an overall - market movement, Indices are used. To get this, in all the financial markets, the concept of basket of constituents - is used to determine the upward /downward trends of markets. Be it Inflation (WPI, CPI), Interest rates, Currencies, Mututal fund's value, and ofcourse Stock Indices. There are principles (Most of them Sound in their reasoning) that determine what the constituent can be and / or cease to be. The markets trusts the same Yes there are often analmolies that a educated observer could determine from time to time, but they are few and most market participants tend to agree. But over a period of time, mistakes can accumulate - but the market particpants get used to the underlying elements as well as the flip side of the same and adjust their behaviour. Moreover, records of the index is available a guiding light - so No one challenges the Index/Basket elements too much nowadays. But does it truly reflect reality of the market is something, for academics to pursue, but market participants will continue to deal with the Near reality and their trust in the Index matters. Maybe an overwhelming counter evidence might make the reconstitution of the index possible and therefore - these tweakings of the Index chaning the undelying constitutent (Stocks) makes sense and helps retain trust. Like 
surajit som
05 Oct, 2017
Stock market is closely linked with economy,politics etc. The latter are changing all the time. So does the market(Index). It would be absurd if the Index constituents remained unchanged. Then it would not be an Index in the first place. Because Index changes with time ,it gives better return. Fixed deposit is more rigid hence less realistic and less return. Like 
G L Malhotra
04 Oct, 2017
Change is law of nature our body constantly keep on changing Skin whole skin changes in 21 days That is all the cell of the skin is thrown away and new cells from the whole skin in 21 days (it may be the fasteset) on the other hand bone takes years to change Thus in few years every molecule of our body goes in the atomsphere and all the molecules of body are taken from the atmosphere even then our skin marks, colour contours are same, our genetic cofigration remain same and so on so changing the constituents does not make any damage to the marketLike (1)
Chandrashekhar Vaidya
04 Oct, 2017
As you have stated and I quote: "A lot of people think of the benchmark indices as a true reflection of markets. And until people stop believing this, the benchmark indices will remain relevant irrespective of the changing constituents." If there are same principles which decide which script goes out and which script replaces it, such cahnges will still retain the trust of people that the index represents the markets. If, however, people suspect that there are no uniform guidelines/principles guiding such decisions, they will not have the trust in the index. Similar thing happens when we try to measure Inflation. When people feel that weights of certain elements in basket of consumption are changed or worse still important elements have been replaced by insignificant elements, they start complaining that the Govt indices do not measure the inflation correctly. So also with GDP and a host of other indices! There's nothing unusual about Sensex/Nifty50!Like (3)
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