What is the NIFTY Alpha 50 Index? :- Process of making the Index

What is the NIFTY Alpha 50 Index?

This index intends to measure the performance of high alpha NSE Securities. To invest and replace the index of 50 shares, criteria such as turnover and market capitalisation are used in the selection of stocks. The weights of the constituents in the INDEX are assigned based on the alpha values. The Share with the highest alpha has the highest weighting of the index..

How INDEX Building and Review Procedure works? 

Calculation Method 
The index is constructed using Divisor method where weights are given based on alpha values of the stocks.
Index review timeline 
The review of Nifty Alpha 50 index is taken up on quarterly basis using historical data of past six month period ending last trading day of February, May, August and November.

How Selection Criteria works?

To be included in the Nifty indices, a company must be based in India and listed on the National Stock Exchange (NSE), whether actively traded or permitted to trade.

Certain securities, like convertible stocks, bonds, warrants, rights, and preferred stocks that guarantee fixed returns, as well as suspended stocks and those in the BZ series, cannot be included.

Companies must be among the top 300 based on their average free-float market capitalization and average daily trading volume over the last six months, measured at the end of February, May, August, and November.
Companies need to have been listed for at least one year.

If a company has gone through a corporate restructuring (like a demerger), it can be considered for inclusion if it has traded for at least twelve months after the restructuring, and it meets all other criteria. 

A company must have traded 100% of the time over the past year.

 The performance (alpha) of eligible stocks is calculated using their prices from the past year, adjusted for any corporate actions, and ranked from highest to lowest.

 The top 50 stocks with the highest alphas will be included in the index.

 To minimize changes in the index, a 100% buffer is applied during each review. This means if an existing stock ranks in the top 100, it can stay in the index.

 Stocks with negative alpha are not eligible for selection. However, an existing stock with negative alpha will remain in the index if there are no eligible stocks with positive alpha.

How Member Selection works?

The performance (alpha) of eligible stocks is calculated using their prices from the past year, adjusted for corporate actions. These stocks are then ranked from highest to lowest alpha. The top 50 companies based on these rankings are included in the index. To minimize changes in the index, a 100% buffer is applied during each review.

How Member Weighting works?

During each rebalancing of the Alpha index, the weight assigned to each stock in the index is based on its alpha value.

Formula for ALPHA :-

                                    Alpha = Ri − ( Rf + β × ( Rm − Rf ) )

Where:
𝑅𝑖 = Return of the stock
𝑅𝑓 = Risk-free rate (e.g., return on government bonds)
β = Beta of the stock (a measure of its volatility relative to the market)
𝑅𝑚 = Return of the benchmark market index

Alpha measures how well a stock performs compared to a benchmark index, considering the level of risk. The formula for calculating alpha helps determine if the stock is doing better or worse than expected based on its volatility (beta) and the market's performance. A positive alpha means the stock is outperforming, while a negative alpha means it is underperforming.

How one can invest in this index?

Look for ETFs that follow the Nifty Alpha 50 Index. You can buy these on stock exchanges like you would buy regular stocks. This path is more comfortable and pocket friendly than choosing index mutual fund of this index.
 [ Alpha] Kotak Mahindra Mutual Fund - Kotak Nifty Alpha 50 ETF (INF174KA1IA5) 

WHAT IS THE P/E RATIO ? :- DEFINITION AND FORMULA WITH AN EXAMPLE

[Note:- There are two most important factors to check while buying etf , first one is daily average volume and second one is total market capitalisation of given etf.]

Okay , now some names of mutual funds provider for this index :-
KOTAK
TATA AIA
MAX LIFE 
BANDHAN  
[ Note :- Mutual fund has a fix minimum amount limit to invest and a few extra charges.]

Tracking of Nifty Alpha 50 Index (2024):-

As you can see in below tables there are some constituents name mark with blue and purple colour. These stocks are newly added stocks as compared to previous quarter.

To track Nifty Alpha index 

Best way to buy this index cheap is to wait for 5-10% correction from all time High and when you come across this kind of opportunity just invest your decided amount this way your average price of the Alpha etf will be less than SIP average.

Since, this index solely depends on stock ALPHA value it can outperform most of NSE Sectorial indexes and other investment instruments.

I hope you enjoy this blog about nifty alpha 50 and learn something new.