Chasing Nifty newbies like Zomato and Jio for quick gains? A risky bet indeed

The Nifty gets a makeover twice a year and this time, Zomato and Jio FInancial are in, while BPCL and Britannia are out. A lot of regular investors think this is a chance to make easy money. A Mint analysis reveals that over the past decade, roughly 64% of retail investors chasing similar index additions have fallen for the hype, expecting easy money from reshuffle-driven rallies. However, history also shows that quick gains do not always materialize.

On paper, the mechanics of index reshuffles are straightforward—the NSE selects stocks based on liquidity (with a market impact cost of 0.50% or lower over six months for 90% of observations), eligibility in futures and options, and a minimum one-month listing history. However, this seemingly simple administrative update often triggers strategic moves by institutional entities, sending market ripples that retail investors may misinterpret. Moreover, history shows that substantial profits are typically pocketed ahead of the official announcement, leaving latecomers to chase diminishing gains. It must be noted that these strategies do not guarantee returns.

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Early mover advantage?

Consider this: Of the approximately 28 stocks added to the index in the last 10 years, 64% yielded profitable returns when held for two months before inclusion, a period marked by intense speculation about their entry. Similarly, investing a month before inclusion, when official confirmation is released, resulted in positive returns in 61% of cases. However, risks remain significant, with some stocks experiencing losses exceeding 20% during these periods. Consequently, median gains were modest, at 0.7% one month before inclusion and 4.4% two months prior.

The Nifty 50 is rebalanced twice a year, in March and September, to reflect India’s leading publicly traded companies based on free-float market capitalization. The latest reshuffle is expected to push up the index’s valuation, with the price-to-earnings (P/E) multiple projected to rise to 20.2x for FY26 and 17.7x for FY27, up from 19.9x and 17.5x previously, according to a Nuvama Alternative & Quantitative Research report.

What about latecomers?

While some investors strategically position themselves ahead of others hoping for quick gains, the strategy is not foolproof. The ones left behind often rush after the inclusion, expecting to capitalize on the new entrants. However, this approach also proves unreliable. Holding these stocks for three to six months after inclusions results in positive return only in 50% of cases, translating into a depressed median return of -0.2%. Extending the holding period to one year shows slightly better results, with nearly 54% of the stocks trading in green since their inclusion and posting overall median gains of nearly 4%. Siddharth Bhamre, head of research at Asit C. Mehta Investment Intermediates, warns against this approach. “By the time a stock joins the index, most of the rally has already played out. Smart investors anticipate these moves in advance.”

For instance, JSW Steel was added to the Nifty 50 index in September 2018. The stock surged 4.2% and 18% in one and two months leading up to its entry. However, after inclusion, it declined 22% in three months, 24% in six months, and 39% over a year. Meanwhile, the Nifty 50 itself posted negative returns ahead of JSW’s inclusion, but rebounded with 6% and 5.3% gains in the following six months and in one year.

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Experts, however, caution against relying on newly added stocks for consistent profit. “Index rebalancing can drive short-term price gains, but it’s not a reliable profit-making strategy for retail investors. Markets are efficient at pricing in known information, and institutional investors position themselves ahead of time. By the time the reshuffle is public, easy money opportunities are gone,” notes Vivek Sharma, Investments head and VP at Estee Advisors.

Further, Nipun Lodha, director of corporate finance at PL Investment Banking explains that once a stock is added to the Nifty 50, it officially enters the large-cap segment and becomes predominantly owned by institutional investors. Unlike mid-cap and small-cap stocks, large-cap stocks have relatively low retail participation outside of systematic investment plans (SIPs) and mutual funds. Any significant price movement usually occurs before the inclusion, meaning post-inclusion gains may already be factored in. However, the inclusion itself serves as a strong validation of the stock’s standing in the market.

What’s next

New entrants Zomato and Jio Financial Services are poised to receive substantial passive fund inflows, estimated at $602 million and $308 million, respectively. Zomato has already gained over 11% in the past year, outperforming the Nifty 50’s 7% rise, driven by strong food delivery growth and improved profitability. Jio Financial Services, spun off from Reliance Industries, has been volatile, posting a negative return of over 35%, but remains a long-term institutional favorite in India’s booming financial sector.

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Lodha stated, “Jio Financial, as an NBFC, and Zomato, as a consumer solutions provider, represent two key sectors poised for significant growth, driving the economy forward. Their inclusion is undoubtedly positive, but the real impact will be seen when retail investor participation increases. This broader participation is expected to pick up after about one and a half months, once the stocks stabilize post-inclusion, creating a stronger market presence.”

Meanwhile, Yatin Singh, chief executive officer of investment banking at Emkay Global Financial Services Ltd, notes that when a stock enters the index, foreign portfolio investors increase their holdings as exchange traded funds (ETFs) tracking Indian markets adjust portfolios. “While index inclusion presents an arbitrage opportunity, it doesn’t necessarily translate into meaningful gains for retail investors.”

Despite the perceived allure of Nifty 50 membership, experts advise focusing on long-term fundamentals, not speculative trades. “Chasing short-term gains from index additions often leads to disappointment. A more prudent approach is to focus on long-term fundamentals, diversification, and disciplined investing rather than reacting to reshuffle-driven price movements,” Sharma added.