If you want to cross a river but don’t know how to swim, then you can simply hire a boat. The sailor will help you cross the river. Similarly, if you have limited knowledge of the capital market then you can participate in it through a mutual fund route.
Mutual funds are managed by professionals who select the share and securities following an in-depth study and design the portfolio of the scheme based on its objective. To evaluate the performance of a scheme, it is benchmarked against an index.
Because the portfolio of a scheme is designed by a fund manager and the selection of stocks is based on their wisdom, therefore, these funds are called active funds. Though fund managers always aim to beat the performance of the scheme’s benchmark yet it may not be possible every time.
The selection may be influenced by emotions and behavioral biases may become an obstacle in the performance sometimes. Now if you want the scheme to replicate the performance of the index that the scheme is tracking, then you have a choice to invest in an index fund. An index fund is a kind of mutual fund but it’s a passive fund. It means the portfolio of the scheme is not designed by a fund manager by his choice. Instead, the fund manager builds a portfolio whose holdings mirror the securities of a particular index.
What is nifty 50 equal weight index?
The Nifty 50 Equal Weight Index is an index managed by NSE which is constituted out of 50 giants. These companies are selected from all the main sectors. The Nifty 50 Equal Weight Index holds shares of the same 50 companies that are on the NSE’s flagship index Nifty 50, but unlike Nifty 50 all the companies are assigned an equal weight at the time of review.
Equal weightage gives a uniform opportunity to all stocks in the portfolio to shine in times of growth. You will agree that a team performs better when all players in the team share equal responsibility. If a company has very little weight in the index, then its performance will not make a big difference in the performance of the index.
If you have a look at the past performance of both these indices, you will find that Nifty 50 Equal Weight Index is a clear winner. Whether it was the recovery of 2002–2003 after the dotcom crash of 2001–2002, the recovery of 2009 after the 2008 Global Financial Crises, or the recovery after the sharp decline in the stock market due to Corona Pandemic in 2020– 2021, the Nifty Equal Weight Index outperformed the Nifty 50.
Benefits of investing in an index fund
In general, the indices are constituted based on back-tested research, there is transparency in the stock selection and managed by a team of professionals. In particular, Nifty 50 Equal Weight Index, is well diversified across the sectors as well as companies. Its portfolio is reconstituted once in every 6 months and re-balancing is done once every three months. Because each company has to carry equal weight in the index and hence if weight of any company goes higher due to its outstanding performance, then it is rebalanced back to equal. In this way, profit booking is also done.
Low turnover and low expense ratios are characteristic of any index fund. Through the Nifty 50 Equal Weight Index, you can invest in 50 companies simultaneously for a small amount, whereas if you want to buy each of those shares constituting Nifty 50, then you will have to invest around 1.50 lakh rupees. Recently, Aditya Birla Sun Life Mutual Fund has launched an Index fund tracking Nifty 50 Equal Weight Index.
Investment can be started with a minimum of 500 rupees. You can invest in this fund through a lump sum or SIP But according to me, at a time when the stock market is at its peak, investing in a staggered manner through SIP or STP route can prove beneficial. Also, like any equity fund, this fund should be considered in the portfolio with an investment horizon of five years and more.
Pankaj Mathpal is the managing director of Optima Money Managers Pvt Ltd. Read his other columns here