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NIMF has launched an interesting industry first smart beta fund – its Nifty 500 Equal Weight Index Fund. This fund will invest equal amounts in each of the Nifty 500 stocks (0.2% allocation to each stock) irrespective of relative market caps. Equal weight indices are gaining traction in a market where the top 10 stocks have huge influence over traditional market cap based indices due to their sheer size.
While a regular market cap weighted Nifty 500 index will have around 75% allocation to large caps (top 100 stocks), the equally weighted index flips it around, with the top 100 accounting for 20% weight (100 out of500 stocks), midcaps accounting for 30% (150 out of 500 stocks) and small caps accounting for 50% (250 out of 500 stocks).
Arun says data from 2005 on the index shows that the equally weighted Nifty 500 outperformed the Nifty 500 index by a robust 3.8%CAGR over 19 years – albeit with greater volatility, which is to be expected when 50% of the allocations go to small caps.
This smart beta index has return characteristics similar to small cap index and volatility characteristics similar to the midcap index, making it a unique broad market play for long term investors.
