Your Questions Answered: What is the Nifty India Manufacturing Index and how are they taxed?

The Nifty India Manufacturing Index reflects the performance of India's manufacturing sector, comprising companies from Nifty indices. It is rebalanced semi-annually and offers diversification benefits. However, it may have a market cap bias and sector-specific risks.

Kuvera
Updated7 May 2024, 09:57 AM IST
The Nifty India Manufacturing Index tracks India's manufacturing sector performance with constituents from Nifty indices.
The Nifty India Manufacturing Index tracks India’s manufacturing sector performance with constituents from Nifty indices.

Q. I am a small business owner running my business out of Indore, my wife is a doctor running her own clinic. We have been investing in large cap mutual funds since the past 8 years, we now want to diversify our investment and invest in index funds. Many of our acquaintances have suggested investing in the Nifty India Manufacturing Index, can you please elaborate on it, its pros and cons and how investments in index funds tracking Nifty India Manufacturing Index are taxed? 

Omkar Khandelwal, Chakala, Andher, Mumbai 

The Nifty India Manufacturing Index is a pivotal index that reflects the performance of the manufacturing sector in India's economy. It is designed to track the behaviour of companies selected from a combined universe of Nifty 100, Nifty Midcap 150, and Nifty Smallcap 50 indices based on a six-month average free-float market capitalization within the eligible basic industries that broadly represent the manufacturing sector.

Established with a base date of April 01, 2005, and a base value of 1000, the index has been a barometer for the manufacturing industry's health and growth. The weight of each stock in the index is determined by its free float market capitalization, ensuring a fair representation of the industry's actual market scenario.

The Nifty India Manufacturing Index is reconstituted and rebalanced semi-annually, aligning with the Nifty broad-based indices. This periodic rebalancing ensures that the index remains up-to-date with the changing market dynamics and continues to reflect the true state of the manufacturing sector.

Also Read: What is Nifty MidSmall Healthcare Index and how is it different from Nifty Healthcare Index?

Eligibility criterion to be part of Nifty Manufacturing Index

Listing on the National Stock Exchange (NSE): First and foremost, to be considered for the Nifty India Manufacturing Index, a company must be listed on the NSE. This ensures that only officially recognized and regulated entities are part of the index.

Part of the combined universe: The company should be a constituent of the combined universe comprising Nifty 100, Nifty Midcap 150, and Nifty Smallcap 50. This combined universe serves as the pool from which potential candidates for the index are chosen.

Free-float market capitalization: A pivotal factor in the selection process is the six-month average free-float market capitalization. The index aims to provide around 75% coverage of the free-float market cap of eligible stocks within each eligible basic industry of the combined universe.

Basic industry classification: Companies that form part of the 'basic industry' based on the Asset Management Company (AMC) classification are eligible for inclusion. This classification ensures that the index accurately represents the manufacturing sector.

Weightage caps: Each stock's weight in the index is based on its free-float market capitalization, subject to a maximum weight cap of 5%. Additionally, there is a minimum weight requirement of 20% for certain manufacturing sectors to ensure adequate representation.

Semi-annual review and rebalancing: The index is reconstituted and rebalanced semi-annually, aligning with the Nifty broad-based indices. This periodic review ensures that the index remains up-to-date with the current market scenario.

Variable number of constituents: The number of stocks in the index is variable, allowing for flexibility and adaptability in representing the manufacturing sector's breadth.

Also Read: Your Questions Answered: How is the Nifty 500 Index different from Nifty 50? Please elaborate

Top constituents of Nifty Manufacturing Index

The top constituents of the Nifty Manufacturing Index as of March 28, 2024, along with their weightage are:

  1. Mahindra & Mahindra Ltd.: 5.02%.
  2. Maruti Suzuki India Ltd.: 5.02%.
  3. Reliance Industries Ltd.: 5.01%.
  4. Tata Motors Ltd.: 4.98%.
  5. Sun Pharmaceutical Industries Ltd.: 4.95%.
  6. Tata Steel Ltd.: 4.11%.
  7. Bajaj Auto Ltd.: 3.32%.
  8. Bharat Electronics Ltd.: 2.66%.
  9. Hindalco Industries Ltd.: 2.62%.
  10. JSW Steel Ltd.: 2.54%.

Performance 

In recent times, the Nifty India Manufacturing Index has shown remarkable performance, outpacing the Nifty 50. The one-year total return of Nifty Manufacturing Index as on March 28, 2024, is 55.04%, in comparison the Nifty 50 as on 28 March 2024 had a total return of 30.08%. This indicates a strong growth trajectory for India's manufacturing sector, highlighting the potential for investors and the economy.

The index's composition is a testament to the diverse nature of India's manufacturing capabilities. It includes companies from various sub-sectors such as chemicals, infrastructure, auto ancillaries, steel, and more. 

The Nifty India Manufacturing Index not only serves as a benchmark for investors but also acts as a guide for policymakers and industry stakeholders. It provides insights into which sectors are thriving and which may need more support, thereby helping to shape industrial policies and investment strategies.

As India continues to position itself as a global manufacturing hub, the Nifty India Manufacturing Index will play a crucial role in monitoring the progress and identifying growth opportunities. It stands as a powerful indicator of India's industrial might and the promising future that lies ahead for the nation's manufacturing landscape.

Also Read: Your Questions Answered: Should I invest in single stocks or index funds? Please elaborate

Pros

Diversification: These funds offer investors exposure to a diversified portfolio of manufacturing companies, which can help spread risk. The Nifty India Manufacturing Index includes companies from various sub-sectors within manufacturing, providing a broad market representation.

Cost-effectiveness: Index funds typically have lower expense ratios compared to actively managed funds. This is because they are designed to replicate the performance of an index, thereby requiring less research and active management.

Transparency: The holdings of index mutual funds are a reflection of the index they track, making it easy for investors to understand where their money is being invested. The Nifty India Manufacturing Index's constituents are publicly available, allowing for clear visibility into the fund's investments.

Performance tracking: Investors can easily track the performance of their investments against the Nifty India Manufacturing Index. This index is reconstituted and rebalanced semi-annually, providing a consistent benchmark for performance comparison.

Cons 

Market cap bias: The weightage of companies in the Nifty India Manufacturing Index is based on free-float market capitalization. This can lead to a concentration of larger companies within the fund, potentially overlooking smaller companies that might offer higher growth potential.

Sector-specific risks: Investing in a sector-specific index fund like one tracking the Nifty India Manufacturing Index exposes investors to sector-specific risks. Any downturn in the manufacturing sector could negatively impact the fund's performance.

Also Read: Your Questions Answered: I am working with an MNC and want to invest in passive mutual funds. Please elaborate on it

Taxation 

Mutual funds tracking an index are typically classified as equity funds for tax purposes if they invest at least 65% of their assets in equities. This classification has significant tax implications for the unitholders. For instance, equity index funds, such as those tracking the Nifty India Manufacturing Index, are subject to capital gains tax, which varies depending on the holding period of the investment.

Short-Term Capital Gains (STCG): If the units of the mutual fund are sold within one year of purchase, any profit realised is considered a short-term capital gain. These gains are taxed at a flat rate of 15%, irrespective of the investor's income tax bracket.

Long-Term Capital Gains (LTCG): For units held for more than one year, the profit upon sale qualifies as a long-term capital gain. Long-term capital gains exceeding 1 lakh are taxed at a rate of 10%, without the benefit of indexation.

Dividend taxation: The Finance Act 2020 brought significant changes to the taxation of dividends from mutual funds. Dividends are now taxed in the hands of the investor, and mutual fund schemes are required to withhold tax on dividends at the applicable rate. This means that any dividends received from mutual funds tracking the Nifty India Manufacturing Index will be taxable for the investor according to their income tax slab.

In conclusion, investing in index mutual funds tracking the Nifty India Manufacturing Index can be a strategic move for those looking to invest in the manufacturing sector of India. However, it's important for investors to consider the pros and cons, and to align their investment with their financial goals, risk tolerance, and investment horizon. 

As with any investment, it's advisable to consult with a financial advisor to ensure that it fits within your overall investment strategy. The Nifty India Manufacturing Index is more than just a set of numbers; it is a reflection of India's industrial ambitions and achievements. It encapsulates the spirit of innovation, resilience, and growth that characterises the nation's manufacturing sector.

Disclaimer: Investing in mutual funds involves risks, including potential loss of principal. Please consult with a financial advisor before making any investment decisions.

Kuvera is a free direct mutual fund investing platform.

 

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First Published:7 May 2024, 09:57 AM IST
HomeMutual FundsYour Questions Answered: What is the Nifty India Manufacturing Index and how are they taxed?

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