>NIFTY CHANGES TO FREE FLOAT (WAY 2 WEALTH)

On Friday, 26th June 2009, the NSE will adopt the free-float method to calculate its benchmark indices from the existing full-float market capitalization method. This is expected to result in significant reshuffling of portfolio by fund managers of index fund in order to align their existing portfolio to the free-float methodology.

Under the Free-float methodology, market capitalization is calculated by taking the share price and multiplying it by the number of shares readily available in the market. Instead of using all of the shares outstanding like the fullmarket capitalization method, the free-float method excludes locked-in shares such as those held by promoters and government.

The free-float method is seen as a better way of calculating market capitalization because it provides a more accurate reflection of market movements. When using a free-float methodology, the resulting market capitalization is smaller than what would result from a full-market capitalization method.

Effect on components: L&T – biggest gainer, ONGC – biggest loser

Stocks which are expected to see its weightages coming down are ONGC, NTPC, Sail, Bharti Airtel, TCS, Power Grid, Wipro, DLF, Reliance Power, Wipro, BHEL etc. due to lower free float. However, Infosys, ICICI Bank, L&T, HDFC and HDFC Bank will stand to gain from this change as their weights will almost double from their current levels due to higher free float.

Impact on sectors- Banks, Engineering to gain the most

Sectors benefiting the most are Banks (weightage to increase from 11.25% currently to 17.24% post changes), followed by Engineering (weightage to increase from 3.26% currently to 7.50%), Cement (from 1.80% to 2.60%), Auto (from 3.63% to 4.35%), IT (from 9.10% to 10.10%). Sectors worst affected are Oil & Gas (from 9.68% to 3.78%), Power (11.98% to 6.09%), Telecom (9.45% to 7.41%), Metals (7.88% to 6.31%) & Real Estate (2.70% to 1.71%).

To see full report: NIFTY