DSP BlackRock Mutual Fund has launched the DSP BlackRock Equal Nifty 50 Fund, its first scheme in the passive fund’s category. If your question was “how to invest in nifty 50 equal weight index?” – DSP is the answer but still, there are many questions which are unanswered.
You can check how it’s different from a normal index fund, key features, DSP presentation, similar product, pros / cons, a lot of data & my views.
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Index Fund Vs DSP Equal Weight Index Fund
An Index fund is a mutual fund scheme where the portfolio is such that it matches the constituents of a popular market index like the Sensex or Nifty. The weight given to different constituents is more or less the same as the market capitalization of the index constituents.
An equal weighted index fund invests in the same constituents as the index it is based on but the amount is invested as equally as possible across all the companies.
For example, HDFC Bank and Kotak Mahindra Bank are part of Nifty. HDFC Bank has a weightage of more than 9% and Kotak Mahindra Bank has about 3.5% in the Nifty. So if you invest in an index fund, 9% of your investment will be allocated to HDFC Bank and 3.5% to Kotak Mahindra Bank. But in an
But in an equal weighted fund, the manager will allocate an equal amount of your investment money in both stocks. So HDFC & Kotak will get 2% each.
DSP BlackRock Equal Nifty 50 Fund
This fund will invest in stocks that compose the Nifty 50 Equal Weight Index in the same proportion as the investments are done in the index.
Investment Objective of DSP Index Fund
- Invest in companies that are part of NIFTY 50 Equal Weight Index in the same proportion as in the index. So 50 Stocks will get 2% each.
- Generate returns that are on par with the underlying index – after fees and charges. The expense will be less than 1% – Index funds have much lower cost in comparison to active funds.
- In the quarterly balancing strategy, the fund will ensure minimising risk by selling out performers at a high and buying underperforming stocks.
Key Features of DSP Equal Weight Index Fund
- The fund has a diversified portfolio as it invests in 50 companies. 95% of the funds are invested in Nifty Equal Weight Index stocks and 5% in debt and debt related investments.
- All the companies that comprise the index are large-cap stocks. So you can have exposure to large cap equity by investing in this fund.
- Since allocation is equal across stocks, there is no fund manager bias etc. that will affect your portfolio.
- You have to invest only a minimum of Rs. 1000 & there is no exit load.
- Management fees and expenses should be expected around 1%.
- The scheme’s performance will be benchmarked against NIFTY 50 Equal Weight Index. The fund manager is Gauri Sekaria.
Should You invest in DSP BlackRock Equal Nifty 50 Fund
I was not able to get raw data so I am depending on other sources including NSE & DSP.
Returns – It is an Equal Weighted Index fund & it tries to generate higher returns than normal Index within the framework of passive management as it is a kind of smart beta passive fund. This is done as it will follow the quarterly rebalancing method where profit booking will be done at regular intervals. (at least fund management want to give this impression)
I got this data from NSE website – if you look at the simple return table (3 year & 5 year CAGR), Nifty50 equal weight returns in this period are lower than a normal Nifty 50 index. I am not sure why DSP did not share normal performance table in their presentation. Long term difference is pretty impressive.
Similar Product – DSP BlackRock Equal Nifty 50 Fund is not first equal weight fund index. Sundaram Smart NIFTY 100 Equal Weight Fund (ETF) is a similar product but their index is even broader Nifty 100. My understanding is Equal Weight strategy works better in a broader index – that gives you chance to capture the growth of a particular stock. But Nifty 100 is not a pure large cap – you can consider it multicap.
Expense Ratio – Biggest benefit of an index fund is lower cost, the expense ratio is lower than active Mutual Fund schemes. On the other hand, it is not clear as to why there should be management fees as it just follows the index that it is based on. If there is active churning for rebalancing of stocks, then the fees would be higher compared to other passive funds. This defeats the purpose of it being an index fund – if we are just looking at the cost.But even 1% is higher for index funds like DSP Equal Nifty – Sundaram is charging 1.5% for ETF. There can be 2 major reasons –
Even 1% is higher for index funds like DSP Equal Nifty – Sundaram is charging 1.5% for ETF. There can be 2 major reasons –
- Asset size – Indian investors are not investing in passive funds. Sundaram was launched in Jan 17, still sitting on 20 Cr AUM.
- Higher Churning – due to quarterly rebalancing & product mandate.
Diversification – An equal weighted index fund will take care of situations such as a change in weight of stocks in the fund, performance of stocks and mean reversion. Today the banking sector has the highest weightage in Nifty. In the near future, it might be different. Moreover, same stocks and sectors do not always perform well. They move towards the mean price. In such cases, you will lose out if you have too much exposure to one stock or sector.
Top 10 Stocks in Nifty 50 Means – 50% allocation. Equal weight scores better in diversification.
Sector Weight – Nifty 50 Vs Nifty Equal 50
Active Vs Passive – Equal Weight Strategy stands somewhere between pure active & pure passive. In India, usually, the actively managed funds perform better than Index funds. So people do not invest too much in index funds but I can visualize that will soon change. As more investors flock to mutual funds – it will be tough for fund managers to generate Alpha. Mutual Funds will not like this statement but it’s true – Alpha Gone Index On 🙂
Misleading Data – DSP is highlighting that the Nifty 50 Equal Weight Index has outperformed Nifty in 11 out of 17 calendar years (Source: DSP Mutual Fund – Slide 6).
NSE Site – you can check entire report here
“On a (fiscal) year on year basis, however, the performance of equal weight index strategy is more balanced. Of the 21 complete fiscal years since inception (from 1996 to 2017), the equal weight index strategy has outperformed its market cap weighted variant for only slightly over half the number of years (11 to be precise). This serves as a reminder that much celebrated equal weighted strategy may not consistently outshine other strategies.”
Torture Numbers – I keep saying that you torture numbers & they confess to anything. DSP is using data since 2000 (calendar year) & NSE since 1997 (financial year). It’s not about DSP – every AMC lie with statistics. If you look at slide 7 – where DSP claims “Investments for 5 year periods delivered POSITIVE returns 100% times”
If you look at slide 7 – where DSP claims “Investments for 5 year periods delivered POSITIVE returns 100% times” – that statement may be right based on the data they have shown but 17 years is very short to prove anything. This is like saying “I suggested you a stock which is up 5% in last 1 month – that means I can generate 60% CAGR returns for you”.
Falling Market Vs Rising Market – I don’t have sufficient data to say this on Indian Index but in Rising Market Equal Weight index will outperform market cap weight index. But in falling market – equal weight index may see more drawdown.
My View –
Future is passive so we should add such funds in our watchlist. Equal Weight Index funds will be more consistent than active funds – will be really helpful in building retirement strategies including Systematic Withdrawal Plan.
If you want diversification, exposure to large caps and do not mind paying a little more fee as compared to other index funds, you can invest a part of your equity allocation in equal weight index fund. On the other hand, if you are a seasoned investor, willing to take higher risks and believe you can do better with active funds, you can continue with the existing portfolio.
Normally we suggest that investors should not invest in NFOs but this is an index fund & we have to judge this based on our conviction about such products.
Disclosure: A few months back a small group of SEBI Registered Investment Advisors met the team of DSP Blackrock AMC (including Gauri Sekaria fund manager of DSP BlackRock Equal Nifty 50 Fund) – I was part of the group. They shared their views on passive funds, how they are doing across the globe, their future in India & their plans (Blackrock is world biggest Asset Management Company – even in passive funds they are bigger than Vanguard). We had a very good discussion – we also suggested that you start with index funds & maybe later ETFs can be introduced. (in ETF Liquidity & managing them is still a major issue in India)
Please share your views on the Index funds & ETFs – feel free to ask questions regarding DSP BlackRock Equal Nifty 50 Fund.