The fund is passively managed and has the same constituents as the Nifty 50, with a 2% allocation to each stock. As the stock market rally gets broad based and earnings growth catches up, the strategy could outperform the Nifty 50.
Over the last one year, the fund has delivered 28% compared to the Nifty’s 22%. It has gained 112% from its lows of March 23, against Nifty’s 91.5%. However, over a 3-year period, it has underperformed the index, gaining 8.81% compared to 13.16% returns from Nifty.
“History has shown in 2003, 2005, 2007, 2009 and 2013, every time after peak polarisation when the top-10 stocks’ weight was close to or greater than 60%, the recovery or rally was led by the bottom stocks,” says Anil Ghelani, head of passive products, DSP Mutual Fund.
Ghelani believes a depolarisation trend is visible in India – bottom-30 stocks in the Nifty 50 index have broken out of a downtrend that was going on since 2018, and this momentum is likely to continue for some time, which will benefit the equal weight Nifty 50.
Over the long term, Nifty 50 Equal Weight has a potential for better risk-adjusted returns. It has outperformed the Nifty 50 in 12 out of 21 calendar years.
“Historically, equal weights have done a bit better than normal weighted Nifty 50,” says Vijay Kuppa, founder, Orowealth. One big benefit of passive funds is the low cost. DSP Equal Nifty 50 direct plan comes with an expense ratio of 40 basis points, which is lower than actively managed funds that could charge between 100 and 150 basis points.
One basis point is a hundredth of a percentage point.
While the Nifty has a 39% weight to financials, the Nifty 50 Equal Weight strategy has a 22% weight. Similarly, information technology constitutes 10% of the Nifty 50 Equal Weight index compared to 16% in the Nifty 50. This lower weight makes the index less dependent on the fortunes of a single sector.
“Investors who are uncomfortable with high weights to a single sector, which increases volatility, could opt for this strategy,” says Anup Bhaiya, CEO, Money Honey Financial Services.
