Nifty Alpha 50 Index

The Nifty Alpha 50 Index is a strategy index that comprises 50 stocks with the highest alpha scores among the top 300 NSE-listed stocks ranked on the basis of their free-float market capitalisation. The key aim of this index is to measure and track the performance of National Stock Exchange-listed stocks that have achieved high Alpha scores in the past year.

High alpha stocks or stocks with high Jensen Alpha score can be defined as securities that have significantly outperformed their chosen benchmark. The alpha score of individual stocks is calculated using the Jensen's Alpha formula.

A positive Jensen Alpha score denotes outperformance vs the benchmark. What's more, the weight of individual stocks on this Index is also assigned based on the alpha score of stock. So, the stocks with the highest alpha score are assigned the greatest weight on this index.

There are a few key criteria that an equity stock needs to fulfill for inclusion into the Nifty Alpha 50 Index:

The formula based approach of the Nifty Alpha 50 index effectively adapts to changing market conditions, especially during volatile markets. As seen in Q4, FY24, the index reduced its exposure in small cap category, given sharp correction in the segment, delivering FY24 returns of 83%. Historical market cap allocation of the index is shared below.

As mentioned earlier, the Nifty Alpha 50 Index consists of 50 stocks which are assigned different weights based on their individual Jensen's Alpha scores. Below is a snapshot of the top 10 stocks included in the index as of 30^th April 2024 along with their individual weights:

As you can see, the above list of 10 stocks that have the highest weight on the Nifty Alpha 50 Index feature many prominent small cap and mid cap stocks, which indicates that these categories of stocks have outperformed benchmark indices in the past 1-year period.

It is also worth noting that any index fund or exchange traded fund (ETF) that tracks this index would replicate the individual weight of each of the 50 high alpha stocks in their respective fund portfolio.

The stocks with high Jensen Alpha scores selected for inclusion into the Nifty Alpha 50 Index are not limited to any specific sector, so this index can be used as the basis of creating a diversified investment portfolio. The below table shows the different sectors featured in the Nifty Alpha 50 Index along with their individual weight as of 30^th April 2024: 

The above list of top 10 sectors and their individual weights are liable to change on a quarterly basis when the index is reviewed and rebalanced by the NSE.

The returns of the Nifty Alpha Index have historically been higher than the broad-based Nifty 50 Index over various time periods. Below are the Nifty Alpha 50 Returns (TRI) for the 1 year, 5 years and since inception period as of 30^th April 2024:

Returns Period Table

Note: The above returns are total returns of the Index as on 30^th April 2024. The 1 year returns are absolute returns while 5 years and since inception returns are CAGR returns. The inception date of Nifty Alpha 50 Index is 19 November 2012. Past returns of an Index do not guarantee future returns of any Index Fund or ETF that tracks the index.

The Alpha 50 investment strategy can also be a good addition to MLI’s actively managed large cap fund, Growth super fund, tracking the Nifty 50 Index. A weighted allocation across both these funds improves its return-risk ratio considerably.

As more and more Indian investors start considering passive investing in Indices as a way to diversify their holdings, one of the common questions is whether it is possible to invest in a specific index. Currently, investors can opt to invest in the Nifty Alpha 50 Index passively in 2 different ways – Index Funds and Exchange Traded Funds (ETFs):

Index Funds: Index Funds are a type of passively managed mutual fund that tracks the chosen index. The goal is to align the investment portfolio of the fund so that it replicates the index in terms of both the constituent stocks as well as the individual weight of each stock.

This way an Index Fund attempt to generate returns that are in line with the returns generated by the chosen index after factoring in applicable tracking error. In recent years, Index Funds have also been introduced by Life Insurance companies which are available to Unit Linked Insurance Plan (ULIP) investors.

Exchange Traded Funds (ETFs): ETF have a structure similar to mutual funds and are managed by a professional fund manager along with a team of analysts. The key difference between an Index Fund and a ETF lies in the fact that the price of ETF units change in real-time and these investments can be traded on the stock market like listed shares.

This allows investors to incorporate various intra-day trading strategies as part of their overall investment strategy. Investors who have active Demat accounts can buy and sell ETF units on the stock market.

The above two methods of passively investing in an Index offer a simpler route that directly investing in equity shares featured on the chosen index. In the case of direct stock market investment, investors would also have to periodically rebalance their portfolio to ensure that the changes occurring in the Index are replicated in the portfolio too.

This method of direct investment to recreate the Index can be quite time consuming and expensive for investors in the long-term.