Nippon India Nifty 500 Equal Weight Index Fund: A Worthwhile Proposition?

India, as you may be aware, is the fastest-growing major economy (fifth largest) in the world with robust policies in place and favourable demographics (long working age and young population).

Despite the global macroeconomic conditions, India continues to remain a ‘bright spot’ according to the International Monetary Fund (IMF) and is expected to be the fastest-growing major economy even this fiscal year. The IMF has increased India’s GDP growth forecast to 7% from 6.8% projected in April 2024.

Moreover, a variety of companies across sectors and market capitalisations have participated in India’s growth story. This even reflects in the corporate earnings of the last few years, which have been very encouraging and the primary driver behind the performance of Indian equities.

Against this backdrop, Nippon Indian Mutual Fund has launched Nippon India Nifty 500 Equal Weight Index Fund that benefits from exposure to the entire Nifty 500 Index equally. If you are keen on being a part of India’s growth story, it means investing in stocks across market capitalisations and sectors is important. During the New Fund Offer (NFO) period, Nippon India Nifty 500 Equal Weight Index Fund will be open for subscription from August 21, 2024, to September 4, 2024.

It is an open-ended equity scheme replicating/tracking the Nifty 500 Equal Weight Index. In other words, the Scheme will benchmark its performance against the Nifty 500 Equal Weight Total Return Index (TRI).

Under normal circumstances, Nippon India Nifty 500 Equal Weight Index Fund will allocate around 95%-100% of its total assets in securities constituting Nifty 500 Equal Weight Index.

The notional exposure of the Scheme in equity derivative instruments shall be restricted to 20% of the total assets of the equity portfolio. This will also include various derivative and hedging products to reduce the risk of the portfolio (in the manner permitted by the regulatory guidelines) and such exposure to derivatives will be rebalanced within 7 days. The exposure to equity derivatives of the index itself or its constituent stocks may be undertaken when equity shares are unavailable, insufficient or for rebalancing in case of corporate actions for a temporary period.

Up to 5% of the Scheme’s assets will also be invested in cash & cash equivalents and money market instruments and/or Schemes which invest in the money market securities or liquid mutual fund schemes.

Further, may engage in Securities Lending not exceeding 15% of the net assets of the scheme and shall not lend more than 5% of its Net Assets to a single counterparty (here counterparty means an intermediary/broker through whom we deal in securities) or such other limits as may be permitted by SEBI from time to time after seeking necessary approval, whenever required.

The Scheme will not invest in securitised debt, ADR, GDR, foreign securities, REITs and InvITs, Fund of Fund (FoF) scheme, Credit Default Swaps (CDS), debt instruments with special features (AT1 and AT2 Bonds), debt Instruments with SO / CE, nor will it engage in short selling and Repo in corporate debt.

Being a passively managed index fund, the Fund Manager would monitor the tracking error of the Scheme on an ongoing basis and would seek to minimize the tracking error. Under normal circumstances, the AMC shall endeavour that the tracking error of the Scheme shall not exceed 2% per annum. However, there can be no assurance or guarantee that the Scheme will achieve any particular level of tracking error relative to the performance of the underlying Index.

What is the Investment Objective?

The investment objective of Nippon India Nifty 500 Equal Weight Index Fund is to provide investment returns that commensurate to the total returns of the securities as represented by the Nifty 500 Equal Weight Index before expenses, subject to tracking errors.

However, there is no assurance that the investment objective of the Scheme will be achieved.

What is the Investment Strategy?

The Nippon India Nifty 500 Equal Weight Index Fund is a passively managed index fund which will employ an investment approach designed to track the performance of the Nifty 500 Equal Weight TRI.

The Scheme seeks to achieve this goal by investing in securities constituting the Nifty 500 Equal Weight Index in the same proportion as in the Index.

The AMC does not make any judgments about the investment merit of the Nifty 500 Equal Weight Index nor will it attempt to apply any economic, financial or market analysis. This would be done by investing in all the stocks comprising the Nifty 500 Equal Weight Index in approximately the same weightage that they represent in the Nifty 500 Equal Weight Index.

At least 95% of the Scheme’s total assets will be invested in the securities comprising the underlying index.

The Scheme may also invest in money market instruments to meet the liquidity and expense requirements.

The Scheme will benchmark its performance against the Nifty 500 Equal Weight TRI.

About the Nifty 500 Equal Weight Index

This index launched on May 31, 2024 (with the base date as April 1, 2005) represents an alternative weighting strategy to its market capitalisation-based parent index, the Nifty 500 Index

The index includes the same companies as its parent index, i.e. the Nifty 500 Index, however, weighted equally.

The Nifty 500 Equal Weight Index is reconstituted semi-annually and rebalanced on a quarterly basis.

Table 1a and 1b: Top Constituents of the Nifty 500 Equal Weight Index and Sector Representation

(Source: NSE Indexogram Factsheet as of July 31, 2024)

Since its inception, the Nifty 500 Equal Weight Index has clocked total returns (which accounts for dividends) of 16.5% CAGR and a price return of 15.0% CAGR (as of July 31, 2024).

Graph 1: Long-Term Performance of the Nifty 500 Equal Weight Index

Data as of July 31, 2024
(Source: MFI, NSE and as presented in the investor presentation of Nippon India Nifty 500 Equal Weight Index Fund)

In the last decade, the Nifty 500 Equal Weight Index reveals that it has created wealth at a remarkable pace. Particularly since the lows of the COVID-19 pandemic, the Nifty 500 Equal Weight Index has witnessed a sharp run-up.

Over the last 5 years, the Nifty 500 Equal Weight Index has clocked a compounded annualised total return of 30.6% and price return of 29.4% CAGR.

Graph 2: Year-on-Year Performance of Nifty 500 Equal Weight TRI and Nifty 500 TRI

Data as of July 31, 2024
Rolling returns considered. Period for Rolling returns: Apr 01, 2005, to July 31, 2024
Rolling returns are compound annualised and calculated on a daily frequency basis Total Return Index (TRI) values are used for calculation.
Past performance may or may not be sustained in future and the same may not necessarily provide the basis for comparison with other investments.
(Source: MFI, NSE and as presented in the investor presentation of Nippon India Nifty 500 Equal Weight Index Fund)

Moreover, across time periods the graph above shows that the performance of the Nifty 500 Equal Weight TRI has been better than Nifty 500 TRI.

Here’s what Sundeep Sikka, ED and CIO of Nippon India Mutual Fund said about the fund launch:

“Building upon our strong track record in passive investments, we are excited to launch the Nippon India Nifty 500 Equal Weight Index Fund. This Smart-Beta strategy adopts an equal weighting approach, in contrast to popular indices like Nifty 500, which use a market-cap weighting approach.”

Who Will Manage the Nippon India Nifty 500 Equal Weight Index Fund?

Mr Himanshu Mange, who has over 4 years of experience will be managing the Scheme. He has been with Nippon India Mutual Fund since February 2022. Before that, he was with TATA AIA Life Insurance Co. Ltd. as an Assistant Manager (Investment Operations – Finance & Accounts).

Himansh is a Chartered Accountant by qualification. At Nippon Indian Mutual Fund, he manages various other index funds and Exchange Traded Funds (ETFs).

How much is the Minimum Investment in Nippon India Nifty 500 Equal Weight Index Fund?

During the NFO period, i.e. from August 21, 2024, to September 4, 2024, the minimum lump sum investment in the Scheme is Rs 1,000 and in multiples of Re.1 thereafter.

An investor can opt for daily, weekly, monthly, quarterly and yearly frequency for  SIPs. In case the investor has not specified the frequency then by default the frequency will be treated as monthly.

Both, the Direct Plan and Regular Plan for available for investments.

After the NFO period, the scheme will re-open for subscription on September 6, 2024.

Who Should Consider Investing in Nippon India Nifty 500 Equal Weight Index Fund?

Investors looking for broader exposure, diversification and equal opportunities across the market-cap spectrum and sectors may consider Nippon India Nifty 500 Equal Weight Index Fund.

Having said that, one ought to be mindful of the valuations. The P/E of the Nifty 500 Equal Weight Index is currently around 34x and P/B around 5x. These levels do not offer much margin of safety.

Note the fortune of the Scheme will be closely linked to the Nifty 500 Equal Weight Index Fund.

Nippon India Nifty 500 Equal Weight Index Fund is suitable for investors having a very high-risk appetite and an investment horizon of around 5-7 years or so.

To know more about the Nippon Indian Nifty 500 Equal Weight Index Fund read the Scheme Information Document and Key Information Memorandum.

Happy Investing!