Should you go for India’s first Nifty ETF based mostly on equal weight technique

Asset administration firm DSP Investment Managers has launched India’s first exchange-traded fund (ETF) based mostly on Nifty 50 Equal Weight Index, the place every inventory within the index will get an equal weight.

The new fund supply (NFO) for DSP Nifty 50 Equal Weight ETF was launched on 18 October and can stay open for subscription until 29 October.

As per the fund home, the equal weighted index will personal the identical 50 firms as Nifty 50 and may have 2% weight to every firm not like the present market capitalization weight design the place some shares get massive weights like 9-10% and plenty of shares within the decrease tail get solely 0.3%.

This provides all firms within the index an equal probability to contribute to returns slightly than being overly depending on the highest 10.

For instance, as a substitute of Reliance Industries Ltd having a weightage of 10.7% in Nifty50 index, the corporate may have 2.0% weight in DSP Nifty 50 Equal Weight ETF.

Similarly, there will probably be decrease sector focus danger in DSP Nifty 50 Equal Weight ETF. Financial Services may have 21.7% weight as a substitute of 37.2%.

Therefore, the DSP Equal Nifty 50 ETF, owing to its methodology, goals to supply higher sector and inventory diversification in comparison with Nifty 50 Index.

“DSP has been the primary mover in launching passive funds utilizing the Equal Weight Strategy in India and we’re excited to launch the primary ETF monitoring Nifty 50 Equal Weight Index within the nation. When we studied this idea of equal weight indices globally, we seen that over lengthy durations equal weighting tends to earn higher returns than market cap weighted indices. This occurs as all the businesses get probability to take part slightly than simply the highest few,” stated Kalpen Parekh, managing director and chief govt officer, DSP Investment Managers.

As per the corporate’s presentation, Nifty 50 Equal Weight Index outperformed the Nifty 50 Index in 12 out of 21 calendar years.

According to Harshad Chetanwala, a Sebi-registered funding adviser and co-founder of MyWealthGrowth, the thesis behind index funds is to blindly comply with the index, due to this fact, equal weight Index funds are usually not within the curiosity of that thought course of.

“Investors who want to get returns in keeping with Index might think about investing in a pure index fund, which may very well be Nifty50 index fund or Nifty 50 ETF. Variations are good, but it surely does change the spirit behind passive investing,” he stated.

The skilled believes that whereas the returns are increased within the equal weight technique, the draw back may be further volatility within the equal weight index portfolio.

“The greater shares within the Nifty50 index might skew returns over the lengthy interval, however within the falling market they act as a cushion, which could not occur in equal weight technique as the load of each inventory will probably be round 2%,” added Chetanwala.

Subscribe to Mint Newsletters * Enter a legitimate electronic mail * Thank you for subscribing to our publication.

Never miss a narrative! Stay linked and knowledgeable with Mint.
Download
our App Now!!