NSE’s New Indices: Boon To Bourse, Curse To Traders
The National Stock Exchange of India (NSE) introduced four new indices in the cash and derivatives segment which are scheduled to trade from 8 April. However, the introduction of these four new indices seemed to be more lucrative for the exchange and other stakeholders instead for retail traders.
The four new indices, Nifty MidSmall Healthcare, Nifty 500 Multicap India Manufacturing 50:30:20, Nifty 500 Multicap Infrastructure 50:30:20 and Nifty Tata Group 25 per cent Cap will be available along with existing Nifty, Bank Nifty, Fin Nifty and Midcap Nifty.
“The new products target particular market niches and give investors more precision. It's possible that current indices, such as the Nifty 50, would keep serving as general market benchmarks, and doubtful that the NSE's introduction of these four new indexes will significantly alter the current indices,” said Sonam Srivastava, Founder and Fund Manager, Wright Research, PMS.
Over the years retail participation in the Indian stock market has massively increased particularly after covid period. The total daily volume of derivative contracts is more than USD 4 trillion per day.
The US derivative contracts contribute to 70 per cent of daily traded volume whereas it is 99.6 per cent (400 times of cash segment) in India. Albeit, the dominating and wide gap of derivative trading is not a unique phenomenon in India. In most markets, the derivative segment accounts for five to 15 times the cash segment.
Indeed A Money Making Tool
Notably, 50 per cent of the losses to the traders were attributed to the high charges. Interestingly, these charges are promptly distributed among brokers, exchanges, our government, and other regulatory bodies, making F&O one of the major revenue sources for them.
“Though F&O is a major source of revenue for exchanges, it is also causing massive losses for retail traders. So, the new trading index is likely to trigger more losses. New indices will definitely add 15 per cent to its overall turnover within a year, given the fact that it is already in nine figures. In addition, it is important to note that in FY23 many F&O traders had shifted to equity. So, this addition of a new instrument to the F&O list could prove to be a remarketing strategy,” said VLA Ambala, Research Analyst, Co-founder, SMT Today.
Greed Negates Outcomes
Originally the derivative tool was devised to hedge risk but the fantasy of huge profit has transformed into a risk-taking device. According to a 2019 Securities and Exchange Board of India (Sebi) report 9 out of 10 traders lose money in the derivative segment with the average value of Rs 56,000 per person.
Such trades are speculative as traders hold the positions for an average of 30 minutes. Only one out of 100 contracts are carried forward to the next day. In fantasy sports, the take rate of the pot is 15 per cent. For every Rs 100 put in by the retail participants, they get Rs 85 back. The concept is the opposite in derivatives, with only 15 per cent of the pot coming back to retail.
The leverage on the derivatives contract and ease of onboarding have allured the influx and greed of retail investors. The leverage difference between equity trading and derivative trading is huge with derivative traders getting leverage upto 500 times their invested capital.
Tribute To Tata
Tata Group enjoys significant influence in the Indian stock market the conglomerate continues to be the most preferred brand among investors. Now, without selling or booking their portfolio, investors will be able to manage stock price fluctuations, if they have it in their portfolio. However, I believe that one should avoid it for trading purposes, at least in the initial months, said Ambala.
The index for the largest listed conglomerate, Tata Group, is introduced as the Nifty Tata Group 25 per cent Cap in the NSE’s new F&O products. According to the NSE, the free float market capitalisation approach is used to identify the top ten firms that make up the index. It has delivered 17.34 per cent returns since its inception and Tata Motors, Titan, and TCS are the main constituents of the index.
The decision to create a Nifty Tata Group 25 per cent Cap index is particularly interesting. This indicates recognition of the significant influence of Tata Group in the Indian stock market. By isolating this performance, investors can track the impact of the group and make more informed decisions about individual Tata companies or compare them against the broader market, said Shrivastava.
