Index funds are the most favourable investment avenue for investors seeking to follow passive investing style. The main objective of index funds is to invest in the securities of a specific index and replicate the performance of the underlying index.
The benchmark indices such as, S&P BSE Sensex, NSE Nifty 50, Nifty 100, and Nifty 500 are some examples of the market capitalization weighted indices. These indices are constituted with top stocks of well-established companies holding an excellent track record in terms of free float market capitalization.
A popular alternative to the market cap weighted index is an Equal Weight Index that represents an equally weighting index strategy. For instance, NSE has two different indices. Nifty 50 index aims to allocate weightage based on market capitalization. On the other hand, the Nifty 50 Equal Weight Index aims to allocate equal weight to constituents under the index, which are similar to the parent index, i.e. Nifty 50.
Similarly, HDFC Mutual Fund has launched HDFC NIFTY50 Equal Weight Index Fund. It is an open-ended scheme replicating/tracking NIFTY50 Equal Weight Index. HDFC AMC has an experience of managing index funds for over 19 years, and is one of the largest investment managers (in terms of AUM*) in index fund category.
On the launch of this fund, Mr Krishan Kumar Daga, Senior Fund Manager at HDFC AMC said, “Corporate profitability had sluggish growth over last couple of years. However, the corporate profitability has remarkably improved recently and outlook looks promising going forward. After a narrow rally due to polarised market for last 2-3 years in recent past, market is in broad based phase now on the back of improving corporate profitability. In the current market dynamics, we believe that HDFC NIFTY50 Equal Weight Index Fund merits due consideration.”
Table 1: Details of HDFC NIFTY50 Equal Weight Index Fund
|Type||An open-ended scheme replicating/tracking NIFTY50 Equal Weight Index.||Category||Index Fund|
|Investment Objective||To generate returns that are commensurate (before fees and expenses) with the performance of the NIFTY50 Equal Weight Index TRI (Underlying Index), subject to tracking error. There is no assurance that the investment objective of the Scheme will be realized.|
|Min. Investment||Rs 5000/- and in multiples of Re 1 thereafter. Additional purchase Rs 1000/- and in multiples of Re 1 thereafter.||Face Value||Rs 10/- per unit|
|Entry Load||Not Applicable||Exit Load||Nil|
|Fund Manager||Mr Krishan Kumar Daga||Benchmark Index||NIFTY50 Equal Weight Total Returns Index (TRI)|
|Issue Opens:||August 04, 2021||Issue Closes:||August 13, 2021|
(Source: Scheme Information Document)
The investment strategy of HDFC NIFTY50 Equal Weight Index Fund will be as follows:
HDFC NIFTY50 Equal Weight Index Fund will predominantly invest in the securities comprising the Nifty 50 Equal Weight Index, i.e. the top 50 large-cap companies out of the 100 large-cap companies. It will aim to generate returns that closely correspond to the total returns of the securities comprising of the underlying index.
The scheme will be managed passively with investments in stocks comprising of the underlying index, subject to tracking error. The investment strategy aims to reduce tracking error/s to the least possible through regular rebalancing of the portfolio, taking into account the change in weights of stocks in the Index as well as the incremental collections/redemptions in the scheme.
However, due to corporate actions in companies comprising of the index, the scheme may be allocated/allotted securities, which are not part of the index. Such holdings would be rebalanced within seven business days from the date of allotment/listing of such securities.
The equal weightage can help to lower the concentration risk of the portfolio and rebalancing gives consistent exposure to top movers in the economy.
About the benchmark
The NIFTY50 Equal Weight Index represents an alternative weighing scheme to its market capitalization weighted parent index, the NIFTY 50 Index. Nifty 50 Equal Weight Index comprises of the same top 50 large cap companies that constitute the popular Nifty 50 Index, but weighted equally, as against market-cap based weightage.
In simple words, it follows an alternative weighting strategy where all 50 companies are weighted equally, i.e. 2% allocation to each company. The portfolio of the index is rebalanced quarterly, i.e. allocation to all 50 stocks is balanced back to 2% every quarter. This results in a periodic automatic profit booking since overweight stocks are sold and underweight stocks are bought.
The following is the list of Top constituents and sectors under the index by their weightage as of now:
Under normal circumstances, the asset allocation will be as under:
Table 2: Asset Allocation of HDFC NIFTY50 Equal Weight Index Fund
|Instruments||Indicative Allocation (% of assets)||Risk Profile|
|Securities covered by NIFTY50 Equal Weight Index||95||100||Very High|
|Debt Securities & Money Market Instruments||0||5||Low to Medium|
(Source: Scheme Information Document)
Who will manage the HDFC NIFTY50 Equal Weight Index Fund?
Mr Krishan Kumar Daga will be the dedicated fund manager for this scheme.
Mr Krishan Kumar Daga is Senior Fund Manager at HDFC Asset Management Co. Ltd. His qualification is B.com and he has over 24 years of experience in Fund Management and Research. Prior to this, he was associated with Reliance Capital Asset Management Company Limited as Fund Manager/Head – ETF, Reliance Capital Ltd. as Vice President, and Deutsche Equities as Vice President.
The other scheme he manages are HDFC Arbitrage Fund, HDFC Banking ETF, HDFC Equity Savings Fund# (Arbitrage Assets), HDFC Gold ETF, HDFC Gold Fund (FOF), HDFC Index Fund – NIFTY 50 Plan, HDFC Index Fund – SENSEX Plan, HDFC Multi-Asset Fund# (Gold related instruments and Arbitrage Assets), HDFC NIFTY 50 ETF, and HDFC SENSEX ETF.
Fund Outlook – HDFC NIFTY50 Equal Weight Index Fund
HDFC NIFTY50 Equal Weight Index Fund aims to offer investors an opportunity to capitalise on broad based economic growth in a disciplined manner. The scheme offers exposure to the top 50 large cap companies on the NSE with an aim to balance stocks and sectoral allocation equally to reduce concentration risk.
This scheme will invest in securities comprising of the Nifty 50 Equal Weight Index, which includes the same constituents as its parent index Nifty 50 weighted equally. With equal allocation to the 50 large cap companies, the underlying index aims to benefit from the growth opportunities across stocks/ sectors, rather than just relying on the performance of few heavy weight stock/ sectors.
Being an index fund, this scheme will passively invest in the stocks consisting of the underlying index and will eliminate the risk of active stock selection. The scheme will replicate the performance of the underlying index by minimizing tracking errors, but may not outperform the index.
Although the automated index reconstruction on a quarterly basis will ensure that the scheme invests in the top performers/ market leaders of the economy, it will still be prone to certain risks. If the market witnesses polarization (as witnessed over the past few years), you may miss higher growth potential of select few stocks due to the cap on investment limit of equal allocation to each company.
This scheme is suitable for investors seeking a simple yet smart way to invest in the top 50 companies from the Nifty 50 index allocating equal weightage to each stock. You must ensure that you have a high-risk tolerance; long investment horizon of at least 5 years, and your investment goals aligns with the fund.
This article first appeared on PersonalFN here