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

Asset administration company DSP Investment Managers has launched India’s first exchange-traded fund (ETF) based on Nifty 50 Equal Weight Index, the place every stock 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 corporations as Nifty 50 and may have 2% weight to every company not like the present market capitalization weight design the place some shares get giant weights like 9-10% and plenty of shares within the decrease tail get solely 0.3%.

This offers all corporations within the index an equal probability to contribute to returns fairly than being overly dependent on the highest 10.

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

Similarly, there will probably be decrease sector focus threat 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 offer higher sector and stock diversification in comparison with Nifty 50 Index.

“DSP has been the first mover in launching passive funds utilizing the Equal Weight Strategy in India and we’re excited to launch the first 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 intervals equal weighting tends to earn higher returns than market cap weighted indices. This occurs as all the businesses get probability to take part fairly than simply the highest few,” stated Kalpen Parekh, managing director and chief government officer, DSP Investment Managers.

As per the company’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, subsequently, equal weight Index funds are usually not within the curiosity of that thought course of.

“Investors who need to get returns consistent with Index might contemplate investing in a pure index fund, which might be Nifty50 index fund or Nifty 50 ETF. Variations are good, however it does change the spirit behind passive investing,” he stated.

The professional believes that whereas the returns are larger within the equal weight strategy, the draw back may be extra 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 strategy because the weight of each stock will probably be round 2%,” added Chetanwala.

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