In the last six months, assets under management of passive offerings have grown by 22%, reflecting the growing acceptance of passive investing among the masses. This is mainly due to the inability of actively managed funds, especially large-cap category funds, to outperform their respective benchmark indexes. On the other hand, investors today have a variety of offerings on the passive side based on S&P BSE Sensex and Nifty 50. Apart from the Nifty 50 index, NSE has also produced several variants of the broad market index. Nifty 50 Equal Weight Index is one such variant.
Nifty 50 Equal Weight Index
The benchmark Nifty 50 index comprises the top 50 companies listed on the National Stock Exchange. The weighting assigned to each company is determined on the basis of its free float capitalization. Therefore, a company with a higher free float capitalization is given a higher weighting in the index. The only difference in the case of Nifty 50 Equal Weight Index is that each of the 50 companies is assigned equal weighting. As a result, all stocks are treated equally, and even relatively small companies in the Nifty 50 universe are held in the same proportion as any larger company, thus avoiding any size or valuation bias.
The index is rebalanced quarterly to correct any imbalances due to price rises/falls relative to the constituent companies. It is reconstituted every six months in line with the restructuring of its parent Nifty 50 index.
How to Invest in Nifty 50 Equal Weight Index
The easiest way to get exposure to this index is through an index fund that replicates this index. At present, there are four fund houses (ICICI Prudential, HDFC, Aditya Birla and DSP) which have offerings based on this index. ICICI Prudential NFO is currently running and is open till September 28, 2022.
Advantages and Disadvantages of Equal Weighting Index
Since the weightage given under Nifty 50 Index and Nifty 50 Equal Weight Index is different, investors can diversify their investments in the broader market. In the case of Nifty 50 Equal Weight Index, there is no company-specific concentration risk as the weights assigned are the same among all the names. For example, under Nifty 50 index, HDFC and Reliance have 20% weighting, while in case of Nifty 50 equal weighting index, the weighting is reduced to 4%. In addition, the sector concentration risk is also reduced in the Equal Weight Index. For example, financial services account for 37% of the Nifty 50 index, while the weighting comes down to 23.3% in the case of an equal weight index. This low concentration risk helps lower volatility while offering a diversified passive portfolio.
index performance
Over the longer time horizon (10, 15 and 20 years), the data shows that the equal-weight variant has outperformed the Nifty 50. The dividend yield is also better on Nifty 50 Equal Weight Index at 2.1% as compared to Nifty 50’s 1.4%. , In terms of price-to-earnings and price-to-book, the Equal Weight Index is better than the Nifty 50, thus providing a higher opportunity to outperform its parent index in the long run.
Historically, while Nifty 50 gives better returns during consolidation phases, Equal Weight Index has performed well in a bull market. Since both the indices behave differently in different market scenarios, investors can reduce overall portfolio volatility by staying invested in these indices. For those looking to invest in a single index, I believe a long-term investor may consider investing in an index of similar weight.
Tax Treatment Since the fund invests in listed shares of Indian companies, it is treated as an equity oriented scheme for tax purposes. Any gains made within 12 months are treated as short-term capital gains and are taxed at a flat rate of 15%. Any gain made after 12 months is a long-term capital gain and is taxed at a flat rate of 10% after the initial capital gain of Rs. 1 lakh from all equity products, which are taxed at zero rate.
Balwant Jain is a tax and investment specialist and can be reached on Twitter at jainbalwant@gmail.com and @jainbalwant.
catch all Mutual Fund News And updates on Live Mint. download mint news app To get daily market updates & Live business News,