HDFC Mutual Fund has launched HDFC Nifty 50 Equal Weight Index Fund. The fund is currently under NFO stage and will soon be available for ongoing subscriptions.
Should you invest in HDFC Nifty 50 Equal Weight Index fund?
The HDFC fund is a passive fund tracking Nifty 50 Equal Weight Index (Nifty 50 EW). There are a few in the Nifty 50 equal weight index funds in the market already. ABSL and DSP also have Nifty 50 Equal weight index funds.
So, if you are keen on investing in Nifty 50 EW index, you have many options. Not much to differentiate between these funds except the expense ratio and the tracking error.
Therefore, the correct question should be: Should you invest in Nifty 50 Equal Weight Index funds?
I have done a detailed comparison between Nifty 50 and Nifty 50 Equal Weight indices in a previous post. Suggest you go through the post for a detailed analysis. In this post, I will post the updated data until July 30, 2021.
Difference between Market Cap Indices and Equal Weight Indices
Nifty 50 is a market-cap based index (capitalization weighted index).
In a market cap-based indices, the bigger companies like Reliance and HDFC will have a higher weightage.
For instance, as on July 30, Reliance has weightage of 9.63%, HDFC has 9.11% and Infosys has 8.74% weightage in Nifty 50. The top 5 stocks make up 40% of Nifty 50 and top10 stocks make up 60%. Source: Nifty 50 Factsheet
On the other hand, in an equal weight index fund, all the stocks will have an equal weight.
For instance, in Nifty 50 Equal Weight index (Nifty 50 EW), all the 50 stocks have the same weightage of 2%.
Yes, the weights will vary between rebalancing dates (as you can see above). However, on the rebalance date, the stock weights will be reset to 2% per stock. Nifty 50 EW follows a quarterly rebalancing schedule. Source: Nifty 50 Equal Weight Factsheet
Note that the constituents of Nifty 50 index and Nifty 50 Equal Weight index are the same. Exactly the same stocks in the two indices. The difference is in the weightage to those stocks.
Is Nifty 50 Equal Weight better than Nifty 50?
Let us look at what the data tells us.
I will compare the performance Nifty 50 with Nifty 50 Equal Weight TRI since the year 2000. I consider price index data (instead of Total returns index).
Note that Nifty 50 EW index was launched only in April 2017. Any index data prior to this date is back-fitted. I have also added Nifty Next 50 index for comparison.
Rs 100 invested in Nifty 50 Equal Weight (on January 1, 2000) grows to Rs 1,343 as on July 31, 2021. CAGR of 12.80% p.a.
Nifty 50: Rs 100 grows to Rs 990. CAGR of 11.21% p.a.
Nifty Next 50: Rs 100 grows to Rs 917. CAGR of 10.82% p.a.
Nifty 50 Equal Weight beats Nifty 50 in 11 out of 21 completed years.
Impressive performance by Nifty 50 Equal Weight.
However, the above chart has a start point bias. We need to look at calendar year and rolling returns.
If you look at the calendar year returns and rolling returns chart, you will see that the bulk of the outperformance of Nifty 50 Equal Weight comes in the first 10 years (2001-2010). In fact, the outperformance comes from the first half of that decade (2001-2010). Over the last 10-15 years, there is no outperformance. The tabulation below also attests the conclusion.
In the last decade (2011-2020), Nifty 50 has done much better than Nifty 50 Equal Weight. In this decade, Nifty 50 Equal Weight beat Nifty 50 in only 4 out of 10 years.
Nothing works all the time
I can’t tell how Nifty 50 Equal Weight will do over the next 10-20 years. The performance over the last 20 years has been impressive.
At the same time, if you are investing in Nifty 50 Equal Weight index, be prepared for extended periods of underperformance. And this applies to any active strategy or smart beta strategy.
Nifty 50 Equal Weight index is a value play. Therefore, Nifty 50 Equal Weight index is a good product if you are an investor who
- Wants to stick to the best listed companies in India; AND
- Prefer passive investments (index funds or ETFs); AND
- Have the value bent. Prefer to move money away from the stocks that have risen towards stocks that have fallen (or have not done well) and you want this to happen automatically
Nifty 50 index is a momentum play. If a stock is doing well, its weightage will increase in the index. Unlike Equal Weight index, the weightage won’t be rebalanced to a target weight. In fact, there is no such thing as target weight in Nifty 50. Therefore, if you believe in momentum and don’t want to move to stocks that have not done well, Nifty 50 is a better choice.
I prefer Nifty 50 index fund.
An interesting stat: Since 2003, Nifty 50 Equal Weight has beaten both Nifty 50 and Nifty Next 50 in just 2 out of 18 years. In 2008 and 2020. Therefore, if you are investing in Nifty 50 and Nifty Next 50 funds, you are already doing a fine job.
Should you invest in HDFC Nifty 50 Equal Weight index fund?
There are already a couple of Nifty 50 Equal Weight index funds in the market.
If you MUST invest in a Nifty 50 Equal Weight index fund, rather than going with a NFO, I suggest you put money in an existing fund. You can compare the performance after 6-12 months. If the HDFC Nifty 50 Equal Weight index hugs the benchmark better, you can switch to the HDFC fund.