ICICI Prudential Mutual Fund launched the ICICI Prudential Nifty50 Equal Weight Index Fund on September 14 this year. The scheme will invest in the companies listed in the Nifty50 Equal Weight Index and will close on September 28, 2022. The minimum amount you can invest through a lump sum is ₹5000 and ₹1000 via a systematic investment plan (SIP).
This index fund scheme will park its investors’ money in the top 50 stocks in the country based on their market capitalization. This implies that its fund managers, Kayzad Eghlim and Nishit Patel, would allocate funds at equal par to all its component companies. The investors would benefit from a higher dividend yield compared to any market capitalization index. This can be attributed to the fund’s basic principle of allocating funds equally to all its companies.
About the product, Chintan Haria, Head- Product Development & Strategy, ICICI Prudential AMC shared, “Since indices perform differently under various market conditions, it is prudent to diversify across indices with different weightage methodology. Nifty50 Equal Weight Index is less concentrated in the top five sectors as compared to the Nifty 50 Index, thus providing an excellent diversification opportunity. Also, there is no size bias as the index tries to reduce the impact of bigger companies on the index performance.”
The businesses of the top 50 companies in the Nifty50 index focus on categories including financial services, IT, oil, gas and consumable fuels, FMCG, and automobile and automotive components. These companies are listed in respective weights of 37, 14.2, 13.4, 8.7 and 6 per cent.
The fund house has shared how the mutual fund scheme investors would benefit from its smart-beta features considering how the index would not be biased in allocating its funds to any one major company. With zero-size bias being at the core of this fund scheme, the stability in the portfolio will be much more compared to most other actively or passively managed funds.
The index would be rebalanced every quarter, which means that the securities would be allocated weights on every rebalancing date. This also suggested that many companies and categories would be included and excluded from the index based on the market conditions every time the fund is rebalanced on every reconstituting date.
Most other similar Nifty50 Equal Weight Index funds have earned more than 14 per cent annual returns, thus, making them a suitable prospect for long-term investment.
Dev Ashish, Founder, Stable Investor says, “Equal weighted index can be suitable for those comparatively conservative investors who want exposure to index stocks but don’t want to concentrate in just a few stocks (as it happens in regular market market-cap weighted indexes). Concentration in the index means that most often than not, the returns of the index are driven by just a few top stocks. The idea of equal weights is to provide equal diversification and help reduce the concentration risk. But we need to understand that concentration has two sides. If the stocks with higher concentration do well, then the index will do better than an equal-weighted index."
“On the other hand, if they don’t, then the equal-weighted index would do better. So, things might average out in the long term. Also, the benefits offered aren’t huge when it comes to returns and if one does a backtest for the strategy. Also, we can’t just rely on backtests alone and ideally, should give some time for such new ideas to prove their mettle in real-time. So, most investors are better off with regular market-cap weighted Nifty50 index funds and ETFs,” he added.
Rahul Agarwal, Proprietor, Advent Financial says, “Of late, index Funds and ETFs have been garnering unprecedented attention by media and investors alike. Investment flows into this category is growing rapidly and to cash in on this appetite, fund houses are queuing up to launch their funds in this category. But not all Index Funds / ETFs are created “equal” (pun intended)."
“Leaving all the technical mumbo jumbo aside, in my opinion, equal weight strategies are inherently value-based, maybe not by design but by default. In contrast, market cap-weighted strategies are momentum oriented as they continue to add weight to stocks and sectors that are going up and vice versa. On the other hand, in an equal weight strategy, in order to maintain the equal weight, rebalancing would ensure adding more to out-of-favour stocks making this a slight contrarian approach,” he added.
This is not the first time wherein a fund house has launched a scheme of this kind. Similar schemes launched in the past include:
|Name of the fund scheme|
|HDFC Nifty50 Equal Weight Index Growth||515||4.57||-||0.60|
|DSP Nifty 50 Equal Weight Index Growth||413||4.68||22.57||0.40|
|Aditya Birla Sun Life Nifty 50 Equal Weight Index Growth||116||4.49||-||0.35|
|Principal Nifty 100 Equal Weight Growth||58||2.04||20.76||0.53|
|Sundaram Nifty 100 Equal Weight Growth||58||2.04||20.76||0.53|
It is important for anyone to understand the underlying construct of the fund they are investing in before putting money into it merely on the basis of recent outperformance. This is important because the inherent tilts towards the momentum and value factor in the respective funds will bring about periods of outperformance & underperformance and one should be okay with that as long as it fits into their target risk-return objective.