India may soon get its first ‘total market’ index fund

India already has index funds covering a broad range of indices like Nifty 500 along with benchmark indices like Nifty and Sensex. In 2019, Motilal Oswal Mutual Fund launched an index fund based on Nifty 500. However, the Total Market Index goes a step further and covers 750 stocks along with ‘micro-cap’ stocks.

According to the NSE factsheet for the index, the Nifty Total Market Index will track the performance of 750 stocks covering large, mid, small and microcap segments. All the stocks which are part of Nifty 500 Index and Nifty Microcap 250 Index are part of Nifty Total Market Index. The weighting of stocks in the index is based on their free-float market capitalization.

The factsheets of NSE further show that Nifty Total Market Index is highly correlated with Nifty 50 with a correlation of 0.98. Readers should note that a correlation of 1 means the movement of two variables that are in lock-step. The 1-year and 5-year returns of Nifty Total Market Index are 63.82% and 16.63% (CAGR) respectively. This is very close to Nifty 50’s returns of 58.54% and 16.82% respectively. This is because the market cap-based weightage assigns extremely high weightage to the large companies in the index. However, the valuation of the Total Market Index is slightly lower than that of the Nifty 50.

“About 70-80% of the weightage of an index fund will be Nifty 50 stocks. Investors who want small and midcap exposure are better off buying index funds tracking those indexes rather than total market index funds. Small company stocks are also illiquid and the fund manager may have to hold a higher cash level to meet the redemption. This will impose a hidden ‘immovability’ premium on the investors,” said Anubhav Srivastava, fund manager and ETF specialist, Infinity Alternatives.