Too much weight on too few shares? Gurmeet Chadha suggests wider statistics for index composition

While the Indian stock markets continue to evolve, some believe that it is time to re -visit the methodology behind the index composition, in particular in how weights are assigned to component shares. The conversation gains in the midst of concern that the current weightings give exaggerated a handful of large-cap names, which may lead to manipulation by large players in large indices such as the Nifty and Bank Nifty.

Such an opinion was shared by investment professional Gurmeet Chadha, Managing Partner & CIO, at Complete Circle, who claimed in a position on X that Indian indices should reconsider how weights and inclusions are determined.

“Indian indices must re -view the methodology of index weights. Apart from the free float market capitalization, the weight on GDP representation can be added,” Chadha said.
He suggested that, apart from the market capitalization of free flows, factors such as GDP representation could also be considered in the weighting process. In the case of the Bank Nifty, he pointed out that two banks-HDFC and Icici-Camer make up 53% of the index, which he described as ‘too lop-shatter’.

He also suggested to elements such as book value for banks and order book statistics for companies of capital goods, to make indices more balanced and inclusive, also attracted attention to X, with several users who moved into different views on the proposal. One user suggested that instead of just trusting the market capitalization of the free flow, every selected company in the index must be given the same weight. This, the user noted, would prevent large companies from dominating the index and helping ensure a more balanced distribution. Another user took a more traditional attitude and said that no changes were needed at all. “Prize is God, the ultimate truth,” the user wrote, adding that regardless of the underlying theory, technical, fundamental or astrological, will reflect results in the price, and the current system will settle.

Another user suggested a more radical approach, which suggests that a parallel index, a “Nifty 50 2.0”, as a test bottom for new methods, which may be merged with the main index in the long term.

Also read: Defense technology companies can become a member of $ 500 billion in 5-8 years: Gurmeet Chadha

((Indemnification: Recommendations, suggestions, views and opinions of the experts are their own. These do not represent the views of economic times)