But do investors need the new fund? The company says they do. “We want to offer a well-diversified fund, in particular to retail investors who are yet to experience equity investing. Also, right now valuations are slightly on the higher side in mid- and small-cap segments. So, this fund offers stability of large-caps,” points out Varun Gupta, chief executive officer of Groww AMC.
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The nitty-gritty
As a passively-managed fund, Groww Nifty Total Market Index Fund will track the Nifty Total Market Index. The Nifty Total Market Index includes Nifty 500 Index stocks and Nifty Microcap 250 Index stocks. Micro cap companies are those that have less than ₹5,000 crore of market capitalization.
The Nifty 500 Index can be split into large-caps (1-100 stocks in market-cap terms), mid-caps (101-250 stocks) and small-caps (251-500 stocks).
In terms of weightages, the Nifty Total Market Index will have 72% weightage in large-caps, followed by mid-caps (16.1%), small cap (8.6%) and micro cap (3.4%). Micro caps will have the least weightage as these companies’ market capitalizations are much lower than other market segments.
What works
The large stock coverage of the fund offers exposure to a well-diversified portfolio, across different company sizes and sectors.
“This fund may be more suitable for first-time equity investors, who are not sure how investments should be allocated across different market segments or which funds to pick,” says Arun Kumar, head of research, FundsIndia.
The fund can outperform concentrated indices like Nifty 50, when there is a broader market rally. Funds tracking the Nifty 50 Index invest in the top 50 companies in India in terms of market capitalization.
When market sentiments are weak, investor flows are limited to these large cap names. Mid-cap and small-cap pockets of the stock market tend to outperform when sentiments are strong. The Total Market Fund— with 24.7% weightage to mid-cap and small-cap stocks—is likely to do better than Nifty 50 during such periods. At the same time, as the fund has higher weight in large-caps, it is likely to be less volatile than mid cap and small cap funds.
What doesn’t work
A comparison of three-year rolling returns between Nifty 50 and Nifty Total Market Index shows that the latter has delivered higher three-year returns in 1,814 observations. While Nifty 50 has delivered higher three-year returns in 1,901 observations.
The three-year returns have been rolled daily over a 15-year period, from 1 April 2008 to 31 March 2023. On an average, the Nifty Total Market Index has delivered three-year annualized returns of 10.54%, only marginally outperforming Nifty 50 Index with 10.5% returns (see graphic).
The same exercise over a 10-year period shows that the Nifty Total Market Index has delivered average three-year returns of 11.61%, against Nifty 50’s returns of 10.93%
The Nifty Total Market Index has delivered higher three-year returns in 1,463 observations, while the Nifty 50 has delivered higher three-year returns in 1,013 observations.
In terms of weightages, the index has a lot of similarities to Nifty 500. The Nifty 500 Index has 75% weight in large-caps, 16% in mid-caps and 9% in small-caps.
The Total Market Index covers 250 micro cap stocks in addition to the stocks in the Nifty 500 Index. However, the index has just 3.4% weight to micro-caps and slightly lower weight in large-caps at 72%. Can this fund meaningfully outperform the Nifty 500 Index with the help of its micro cap allocation? Only time will tell.
What should investors do
Actively-managed funds, particularly in large-cap segment, have seen their outperformance shrink. But that’s not yet the case when it comes to mid-cap and small-cap funds. Here, actively-managed funds have continued to demonstrate their ability to outperform benchmark indices.
“There is still ample scope of outperformance in actively-managed mid-cap and small-cap funds. So, investors with a certain understanding of MFs should still look for actively-managed funds in mid-cap and small- cap space, along with a traditional Nifty 50 Index for a large cap exposure, to complete their equity portfolio,” says Kumar of FundsIndia. Certain small-cap funds also take sizeable exposure in micro cap companies.
When broader markets rally, the Total Market Fund can outperform narrow indices like Nifty 50. Broader market indices tend to do well during such periods. “Investors who have just experienced bank fixed deposits or other simple products can consider such an all-market fund to start their equity journey. As it is a passive fund trying to mimic the index, there is no risk of underperformance due to the fund manager’s investment decisions,” points out Nirav Karkera, head of research at Fisdom. Stock selection, assigning of weightages to each stock, entry and exit will all happen in accordance with index’s semi-annual re-balancing
Investors can let the fund build a track record and see how efficiently it can track the underlying index. The new fund offer is open for subscription from 3-17 October.