Q. I am a 29-year-old married professional working with one of India’s top business houses in their Delhi office. My husband is a surgeon working with a government hospital in Delhi. Both of us have been investing in Nifty 50 and Sensex Index funds for the past 5-6 years and are satisfied with the return delivered by our index funds. I recently read about certain mutual fund houses launching index mutual funds tracking the Nifty Total Market Index which tracks 750 plus stocks. Can you please elaborate on the Nifty Total Market Index, its pros and cons and if it is better than Nifty 50?
Arti Mohan, Cherrapunji, Meghalaya
A total market index is a stock market index that typically tracks the performance of publicly traded companies from different market segments including largecap, midcap and smallcap. Total market indices are designed to provide a broad representation of the overall stock market, and they are often used as benchmarks for investment performance.
How does a Total Market Index fund work?
A total market index fund is a type of mutual fund or exchange-traded fund (ETF) that tracks a total market index. When you invest in a total market index fund, you are essentially buying a small piece of every company in the index. This gives you instant diversification across a wide range of stocks and sectors.
Nifty Total Market Index
The Nifty Total Market Index is a total market index that tracks the performance of 750 stocks covering large, mid, small and microcap segments via a single index. Companies that are part of the Nifty 500 index or the Nifty Microcap 250 index constitute the Nifty Total Market index. Stock’s weightage is calculated based on its free-float market capitalization. This means that the largest companies in the index have the biggest impact on its performance.
Benefits of investing in a Nifty Total Market Index Fund
Diversification: Total market index funds provide broad diversification across a wide range of stocks and sectors. This can help to reduce your risk of loss, as your investment is not concentrated in any one company or sector.
Low cost: Total market index funds are typically very low-cost investments. This is because they are passively managed, meaning that the fund manager does not try to beat the market.
Simplicity: Total market index funds are very simple to invest in. You can buy and sell them just like any other stock or ETF.
Drawbacks of Investing in a Nifty Total Market Index Fund
Like all stock/mutual fund investments, your investment in the Nifty Total Market Index is subject to market risks. The main drawback of investing in a Nifty total market index fund is that it tracks the performance of 750 plus stocks representing broadly the entire stock market. This means that if the Indian stock market performs poorly due to macroeconomic reasons, your investment will also lose value.
Who should invest in a Nifty Total Market Index fund?
Nifty Total Market Index funds are a good option for investors who are looking for a low-cost, diversified investment. They are also a good option for investors who are new to the stock market, as they are very simple to invest in.
Past returns of Nifty Total Market Index
The Nifty Total Market Index has outperformed the Nifty 50 Index in the past 5 years, which is the most popular stock market index in India. Over the past 5 years, the Nifty Total Market Index has returned an average of 13.9% per year, while the Nifty 50 Index has returned an average of 12.4% per year (as of September 29, 2023).
Key differences between Nifty 50 and Nifty Total Market Index
Number of constituents: The Nifty 50 Index has 50 constituents, while the Nifty Total Market Index has around 750 constituents. This means that the Nifty Total Market Index provides much broader coverage of the Indian stock market.
Coverage: The Nifty 50 Index tracks only the performance of large-cap companies, while the Nifty Total Market Index tracks the performance of large-cap, mid-cap, and small-cap companies. This means that the Nifty Total Market Index provides exposure to a wider range of companies, including smaller companies that have the potential for higher growth.
Things to keep in mind before investing in a fund tracking Nifty Total Market Index
Tracking error: Tracking error is the difference between the performance of a mutual fund or ETF and the performance of the index it tracks. All mutual funds and ETFs have some tracking errors, but total market index funds typically have very low tracking errors.
Expense ratio: The expense ratio is the annual fee that investors pay to own a mutual fund or ETF. Total market index funds typically have very low expense ratios, which makes them even more cost-effective for investors.
Liquidity: Total market index funds are very liquid investments, meaning that you can buy and sell them quickly and easily. This is because they are traded on the stock exchange.
In conclusion, Nifty total market index funds are a good option for investors who are looking for a low-cost, diversified investment. They are also a good option for investors who are new to the stock market. However, investors should be aware that Nifty total market index funds track the performance of a wide range of stocks, so its value can fluctuate depending on the overall market conditions and macroeconomic conditions.
Kuvera is a free direct mutual fund investing platform.
Note: This is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.
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Updated: 27 Oct 2023, 10:32 AM IST