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How Nifty Index Passive buyers beat ITC as well as trading against themselves ?

MoneyDhan > Blog > How Nifty Index Passive buyers beat ITC as well as trading against themselves ?

Let me clarify before you say this statement, “Yet another write up about Nifty, why an index is great bla bla..” I know you are kinda expert with respect to this topic. But then we realized there could be some novice readers as well as data hungry nerds like us , who want data to prove a point when it comes to financial market.

Thus we have 3 parts to this write up.

  • Experts
  • Novice
  • Data seeker Nerd
3 Minutes Read

In year 2015, Reliance was 500 RS per share. And ITC was 200 RS per share.

Let’s imagine you invested 10 lakhs in ITC and 10 Lakhs in reliance.

Today ITC 10 Lakh is, still 10 Lakh. But Reliance 10 Lakh is, 30 lakhs.

One condition for you is, You cannot bring in new money.

You have 2 choices

  1. Sell some ITC, and buy more reliance at all time high.

  2. Sell some Reliance at all time high and buy ITC.

If you follow choice 1,
that is how nifty Index weightage allocation operates.

If you follow choice 2,
that is what majority of “logically, smart, conservative, judicious” investors do.

And that is how my friend, why lots of such people are talented in accumulating and holding onto loss making stocks.

In 2015, They will tell you how they exited Hdfcbank once and now have complete faith in Yesbank, Rcom, suzlon, DHFL etc. Do note we are talking about year 2015, the individual Entered those stocks 5 years back, before they became dud/rotten. Even Anil Ambani had no clue that he will go bankrupt 5 years back in 2015.

If you think you are not one of them, here is the test.
Cut all stocks that are at loss in your portfolio and give that money to top 3 performing stocks. You will hesitate. Its completely illogical, isn’t it?

If i am index, I will exit my hdfcbank the day icicibank or Kotak bank over takes it in market Capitalization.

I will exit TCS and buy Infosys the day, Infosys market Capitalization is higher than tcs

Nifty wahi toh karta Hain. And thus Index buyers are actually trading against themselves and making money.

Indices are self-sustaining mechanism of ruling out losers and embracing winners (which is opposite of what retail investors generally tend to do).
Hence only 7.5% of active fund managers have been able to beat index over the past 15 years.
Index kicks out an ill-performing stock sitting at the tail of index and bring in a superior performing stock jumping at the forefront of the next-best lot.

So while buying index, you are getting an expensive Reliance which could rally further up while you shed some ITC which will bleed less now.

Another example is tesla.
It will have 1% of index sp500 weightage. And SP500 has a market capitalization of around $30 trillion. India is hardly 2.5 Trillion dollar market cap (all companies added up).

Look at the pic, at what price tesla got included into an index. Even though it is an ridiculous process – The irony is that, index buyers beat more than 90 % of active fund managers (post fee).

An index buyer trades against himself by buying more winners and letting go off looser in price. 

Index buyers have done well in comparison with ITC, Sun pharma, maruti etc.. all big fundamentally strong names which are lagging in price action.

Nifty's Algorithm Key points

More weightage to performing stock

Lagging stocks are let go off

Never averages on a downward sliding stock

Against the natural human intuition. Buys more at 52 week high.

No Regards to fundamentals of a company

Top 10 stocks get 60% weightage amongst 50

Makes a new high every 3 years, even after crashes

Top 50 largest stocks only

8 Minutes Read

You have read multiple times before, how ETF or Index Funds can get our job done for long term wealth creation. For the un-initiated,

What is an Index?

A bag of top 50 stocks in India. They constitute of the most largest companies by market capitalization.

This index has a bad habit. If you loss market value; you are out. There is room for just 50 successful companies and if you are the 51st guy, you are out ! Then there is race to reach the top where, you gain maximum weightage.

Do notice, it takes a life time for a company to move from company formation till, get to IPO listing. Another few decades before this listed company gets included into Nifty Index.

Thus only the most well run, well managed companies make it.

Would like to see that list of 50 companies as on December 25th 2020 ?

Do notice the difference in toppers data; Top nifty weightage is not top market capitalization of companies. Nifty weightage is not dependent just on market capitalization but on other factors. Ignore them for now.

Capitalization means, the amount in crores that you need to own 100% of the company.
Even though Reliance is 2nd in Nifty weightage, it is 5 lakh crore more expensive than HDFCBANK. This is due to market float and other nuances that we are not going to discuss now.

The point is, big top 50 successful guys stay in index.

Ditching the Index, what does a smart individual investor intend to do with shares directly?

The Smart, knowledgeable, experienced investor reads in depth about few companies that can out perform the nifty in future. They try to identify those which are lagging behind. Atleast this is what they think they are doing (pun intended)

Go back to 2015 , they would have stumbled upon DHFL, Rcom, ITC, Yes Bank which were the hot and favorite stocks with tremendous high growth potential.

  • Yes Bank was flaunted as next HDFCBANK. Today in 2020, Next HDFCBANK is HDFCBANK itself.
  • Likewise, Anil Ambani was looking strong with Rcom. However His brother launched JIO and it just took knee caps out of Anil Ambani’s empire. No one could have predicted this signs. Except Nifty Index.

Yup. That nifty index algorithm saves you from disasters. HOW?

Nifty index notices the prices of these stocks falling. Price talks. That is what efficient market hypothesis states.

Subsequently the weightage assigned to this poor performing stock starts to get reduced. Just like you do not give bonus to those employees who under-perform. Index algorithm migrates that reduced weightage to top performing stocks.

Do remember, The total sum of weightage between 50 stocks is always 100%. This means, that reduced weightage from poor stock is given to those shares/stocks that are going up and gaining larger market capitalization. Think of giving bonus to your best employees for out-performing.


I believe now you see tricky problem with smart, all-knowing, hard core research guys. They keep averaging the loosing stock in hope for a “phoenix” like rise from ashes. The way we all trust gold and keep accumulating it whenever it falls, they assume the stock they hold is a gold of some sort.

They see a fall in stock price as opportunity to buy more at lower price.
Nifty looks at a falling price akin to a fruit that has got rotten. Price reflects lower quality of the business and thus, less weightage to that specific looser stock. You probably missed this “quality deterioration factor” between a fruit and gold.

Believers think price is down but quality is intact. The low price is an opportunity to buy at bottom. Nifty algorithm says, price is down because quality is down and thus share is fairly priced.

Sometimes believers ideology works. Congratulations to them. Most of the times even if they don’t gain much-they don’t loose much. Returns remain flat. What they loose is missed opportunity in terms of the opportunity cost.

In hindsight after few years, you could end up noticing that the same money in Fixed Deposit could have done better or, same money in HDFCBANK would have doubled in 4 years etc. Not loosing money is okay for 1-2 years. Not making 100% within 6 years via stocks is a crime. That is what we at moneydhan believe.

The risk that we undertake must be compensated. If you are in stock market, get 100% within 6 years. If you don’t want risk, gain 100% via SBI BANK FD by waiting for 12 years.

4 Minutes Read

We have been blashing ITC so far in this article. Definitely it has made some of you ire against us. Ofcourse you own ITC. Mister Dmuthu (twitter influencer) sir has been vocal about ITC and there is a huge army of retailers who are in ITC. You might be one of them. Trust me, this is deliberate. Let us tell you a secret.

In year 2014, Nifty gave the highest weightage to ITC !!

Between year 2015 and 2020 , ITC managed to rally then dump down and end 5 years at almost 0% growth.
Check the market cap chart below. You will see it crashed almost 50% from its peak valuation. Such a crash is not appreciated by nifty algorithm, especially when you were the largest weightage guy in 2015.

Lets explore,

What happened to ITC inside Nifty index since year 2014.

The below image will detail out certain data points since January 2014

  • Market capitalization of ITC is still same since 2015.
  • Stock Price is 215 by year January 2021. And there is 46 rupees of dividend missing.
  • From a great rank of 1st in 2014, inside Nifty Index. ITC is at rank 9 now.
  • When ITC was rank 1 in Nifty index, The weightage was 8.76%. Now its just 3.03%

In Nifty, 50 stocks are there. If you had 1 crore invested in Index ETF.

In year 2014,Rupees 8 lakh is invested in ITC. (Highest allocation)
By year 2021, Rupees 3 lakh is invested in ITC. The missing 5 lakh is chasing better performing stocks.

Which stocks performed if ITC was lagging behind?

While ITC was not growing, HDFCBANK, Reliance and HDFC LTD was taking the top spots.

HDFCANK was 600 in year 2017. It is 1400 in year 2021. Nifty Index passive investor kept adding more and more while HDFCBANK was going up ,making all time new high.

Reliance was 536 in year 2017. It is 2000 in year 2021. Reliance gave 300% returns. NIFTY Passive investor didn’t earn that 300%. However, they earned hefty well. Beating alot active investor in direct stocks. (Not us though!)

Passive investor was buying against his own logic. You don’t really “add stocks” when they are at all time high. Did you notice the game Nifty is playing while, active investors/Value investors/bargain hunters are left to hung up with laggards. They accumulate the falling stock. Then get stuck with it.


While Nifty ETF or Nifty Index buyer did not earn 300% like reliance generated. It sure didn’t lag behind like ITC. NIFTY averaged at 130% returns in 5  years. Decent of some sorts.

The day ITC will rally up, sure thing that the Retail ITC investor will sure re-Joyce. However even Nifty Passive investor will gain some portion of this glory too. ITC weightage will increase in Nifty. This will cause more money to chase ITC, and thus averaging on the up side.

If you are now wondering what to do with existing ITC.. Check the below chat

About the author

Founder & Chief Strategist www.MoneyDhan.com