You picked a value index fund. You read about the strategy. You liked the logic of buying cheap stocks, and you invested for the long term.
And then, the index provider revised its definition of “value.”
No wrongdoing by anyone. Your fund tracked the index faithfully, exactly as it promised. Yet the mix of stocks in the portfolio now looks quite different from the one you bought. Sounds strange, doesn’t it?
However, this can happen.
In this post, let us look at a risk most investors never consider when they buy factor index funds. The risk that the index provider changes the rulebook itself. We will use the Nifty 50 Value 20 index as an example, and then see why plain market-cap indices largely escape this problem.
A factor index is just a rulebook
A market-cap index answers one simple question: how large is the company? The Nifty 50 holds the 50 largest stocks, weighted by free-float market cap. That is essentially the whole rule.
A factor index is different. It is a recipe. Value, momentum, quality, low volatility, alpha, equal weight. Each is a set of rules that decides which stocks qualify and how much weight each gets.
And the index provider owns that recipe and can revise it. And providers do revise, usually for sound reasons (even though you may not agree). To capture the factor better. These changes are published in the methodology document and the factsheet.
Your fund only tracks the index. Hence, when the recipe changes, your holdings change automatically, without any action from the fund manager, and without you doing anything.
What actually happened to Nifty 50 Value 20?
| Dimension | Old methodology (Sep 2024) | New methodology (Jul 2026) |
| Value factors used | ROCE, PE, PB, Dividend Yield | Earnings/Price (E/P), Book/Price (B/P), Sales/Price (S/P), Dividend Yield |
| Factor weighting | Rank-weighted 40% ROCE, 30% PE, 20% PB, 10% DY | Equal 0.25 each on E/P, B/P, S/P, DY |
| Selection method | Ordinal rank on each factor; ranks blended; top 20 by final rank | Z-score of each factor; weighted-average Z; top 20 by value score |
| Constituent weighting | Free-float market capitalization | Free-float market cap x value score |
| Reconstitution frequency | Annual, December only | Semi-annual, June and December |
| Data window for review | Reviewed in December (annual) | Six months ending May and November |
| Capping realignment | 15% cap, realigned quarterly (Mar/Jun/Sep/Dec) | 15% cap, realigned semi-annually at rebalancing |
| Data source: NiftyIndices.com (Methodology document) Disclaimer: The securities quoted are for illustration only and are not recommendatory | ||
Until recently, this index selected stocks using ROCE, PE, PB and dividend yield, with the largest weight (40%) on ROCE. It was reviewed once a year, in December.
The methodology has since been revised. ROCE is gone. The stock selection now depends on Earnings-to-Price, Book-to-Price, Sales-to-Price and dividend yield, weighted equally.
Rebalancing happens twice a year, in June and December.
| Industry | May 2026 | June 2026 | Change (June – May) |
| Banks | 40.60% | 46.26% | +5.66% |
| IT – Software | 22.42% | 12.25% | -10.17% |
| Petroleum Products | – | 12.47% | +12.47% |
| Automobiles | 9.08% | 3.49% | -5.59% |
| Power | 7.71% | 5.15% | -2.56% |
| Diversified FMCG | 6.77% | 5.58% | -1.19% |
| Non – Ferrous Metals | 3.99% | 2.29% | -1.70% |
| Oil | 2.52% | 3.90% | +1.38% |
| Pharmaceuticals & Biotechnology | 3.88% | – | -3.88% |
| Consumable Fuels | 2.55% | 3.04% | +0.49% |
| Cement & Cement Products | – | 1.99% | +1.99% |
| Ferrous Metals | – | 1.98% | +1.98% |
| Finance | – | 1.35% | +1.35% |
| Total equity | 99.52% | 99.75% | +0.23% |
| Source: Monthly Portfolio Disclosures, Nippon AMC Disclaimer: The securities quoted are for illustration only and are not recommendatory | |||
Note: I had a methodology document downloaded in September 2024 that I used to compare. However, my understanding is that this change in methodology happened very recently. The rebalance in June 2026 is very likely the first one with the new methodology.
The name of the index did not change. What it holds did.
What may have prompted this change?
I could not find any communication/documentation on NSE website highlighting the reasons. Therefore, I don’t know what exactly prompted this change.
The most likely explanation is that the revised definition is closer to the conventional definition of value.
ROCE (Return on capital employed) is a quality parameter and not value. And with 40% weightage to ROCE, the old definition of Nifty 50 Value 20 gave you exposure to Quality-Value stocks in the Nifty 50 space.
In fact, ROCE may even be anti-value. An index with a higher weightage to ROCE will structurally favour asset-light, high margin businesses because such companies earn large profits on very little employed capital. This will favour IT services firms and FMCG. But this methodology works against banks. The ROCE formula does not fit a bank’s balance sheet. Deposits and borrowings are its raw material, so its capital employed is huge and the ratio comes out distorted. Moreover, the markets will pay more for higher profitability. So, you can expect companies with higher ROCE to trade at higher valuations (and not lower). Therefore, a decent weightage to ROCE may be diluting the “value” signal of the index.
The revised definition focuses only on Price-to-Earnings, Price-to-Book, Price-to-Sales, and Dividend Yield. These are more conventional parameters of value.
I can only speculate about other reasons. For instance, the index had underperformed recently, and that underperformance could be attributed to its heavy weightage to IT stocks. Many commentators also think IT stocks will continue to struggle because of advances in Artificial Intelligence. Under the old methodology, the index may have retained a higher weightage to IT stocks, and it is possible the provider wanted to reduce that. But this is speculation on my part, and I would not read too much into it.
The index methodology has changed. Not much you can do about this. But there are lessons and concerns here too.
What if you had chosen Nifty 50 Value 20 index for exposure to quality-value stocks?
In such a case, you may want to revisit your decision in such an index fund/ETF.
But there is a bigger problem. How would you come to know about the change in methodology?
Do not expect NSE to communicate this to everyone who has invested in an index fund/ETF tracking such an index. It won’t even have contact details of such investors.
The fund houses (AMCs) would have both pieces of information. That the index methodology has changed. And AMCs also have contact details of investors. Did AMCs inform the investors? In my view, a proactive AMC ought to have flagged such a change to its investors.
I also stumbled upon this when I noticed Nifty 50 Value 20 index was not moving up (as much) despite a sharp run-up in IT stocks in July 2026. With higher exposure to IT stocks (that I thought it had), it should have gone up more. When I dug deeper, I noticed the sharp reduction in allocation to IT stocks. That’s what led me to look at the new methodology document. The unfortunate part is that the new document does not even mention how and when the methodology was changed.
Fortunately, I had an old Nifty Indices methodology document downloaded on my system and I used that to compare with the new methodology.
Moreover, the past performance of any index fund/ETF following NV20 index counts for little. Because the methodology has changed. The method that delivered outperformance (or underperformance) in the past has changed. How do you trust the past performance?
This is not too different from fund manager risk with active funds. With active funds, you are exposed to style drift, and there are no crisp rules around stock weightages. You simply trust the fund manager to do the right thing.
One could argue that factor funds eliminate such risk through a rule-based stock selection and weighting methodology. However, when the methodology itself can change, such comfort goes away.
And this is where cap-based indices score over factor funds and actively managed funds. Simple and consistent methodology with little scope for change in rules. I have compared the 2 approaches (cap-based vs factor-based) from 2009 to 2025.
Should you avoid investing in factor funds?
I leave this to your judgement.
When you buy a factor index fund, you are relying on a rulebook that someone else maintains and can revise. A market-cap index carries almost none of this risk. Its rules are objective and rarely redefined. Yes, constituents get added or dropped, but nobody wakes up and changes what “large” means. Hence, I prefer a plain market-cap index for the core of an equity portfolio. Factor index funds/ETFs could form a part of your satellite equity portfolio (just like actively managed funds).
Whether to use such a factor index product, which product to use, and how much allocation to the product are your decisions. You must base these decisions on your risk profile and comfort/conviction in a factor strategy. Conviction is critical because any factor strategy will go through long periods of underperformance that will test your patience. Consider such risks while sizing your bet/allocation to factor products. A strategy whose very definition can change should not be your largest holding.
And yes, as highlighted in this post, keep checking the methodology on a regular basis. You must revisit your decision to invest if there is a drastic change in index methodology.
Disclaimer: This is not a recommendation to invest or not invest in factor index products. This is not a recommendation to invest or not invest in Nifty 50 Value 20 Index funds/ETFs. Please do your homework and understand the product properly before investing.
Disclaimer: Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Investment in securities market is subject to market risks. Read all the related documents carefully before investing.
This post is for education purpose alone and is NOT investment advice. This is not a recommendation to invest or NOT invest in any product. The securities, instruments, or indices quoted are for illustration only and are not recommendatory. My views may be biased, and I may choose not to focus on aspects that you consider important. Your financial goals may be different. You may have a different risk profile. You may be in a different life stage than I am in. Hence, you must NOT base your investment decisions based on my writings. There is no one-size-fits-all solution in investments. What may be a good investment for certain investors may NOT be good for others. And vice versa. Therefore, read and understand the product terms and conditions and consider your risk profile, requirements, and suitability before investing in any investment product or following an investment approach.