SBI Nifty 500 Index Fund: Should You Invest?

SBI Mutual Fund, India's largest mutual fund house by AUM, seems to be in the race to garner more Assets Under Management as it has launched a variety of schemes in the year 2024 - both actively managed funds and passively managed index funds and Exchange Traded Funds (ETFs). It appears that, like most other fund houses, SBI Mutual Fund is capitalising on the bull phase and upbeat sentiments in the Indian equity market.

The new one from the stable of SBI Mutual Fund is the SBI Nifty 500 Index Fund. The Scheme aims to generate long-term capital appreciation by investing in securities covered by the Nifty 500 Index.

During the NFO period, the Scheme is open for subscription from September 17, 2024, to September 24, 2024. Thereafter the scheme re-opens for subscription within 5 business days from the date of allotment.

SBI Nifty 500 Index Fund is an open-ended equity mutual fund scheme replicating/tracking the Nifty 500 Index. Simply put, the returns of the Scheme would correspond to the returns of the Nifty 500 Index, subject to tracking error.

Up to 95% to 100% of the Scheme's total assets will be invested in securities covered by the Nifty 500 Index.

The Scheme may take exposure to equity derivatives of constituents of the underlying index for a short duration when securities of the index are unavailable, insufficient or for rebalancing at the time of change in the index or in case of corporate actions, as permitted subject to rebalancing within 7 days (or as specified by SEBI from time to time). However, the exposure of the Scheme for non-hedging and rebalancing purposes shall be up to 20% of the net assets of the Scheme.

The Scheme would also invest up to 5% of its total assets in Government securities (G-secs), including Triparty Repo, and units of liquid mutual fund.

The Scheme may also engage in stock lending and borrowing up to 20% of the net assets of the Scheme with maximum single intermediary exposure restricted to 5% of the net assets or as permitted by SEBI from time to time.

The cumulative gross exposure through equities, in G-secs including Triparty Repo, and units of liquid mutual fund and equity derivatives (gross notional exposure) shall not exceed 100% of the net assets of the Scheme.

The Scheme will not invest in the following:

• Repo and reverse repo in corporate debt

• Credit Default Swaps (CDS) transactions

• ADR/GDR/ Foreign Securities

• Securitized debt

• Debt instruments with special features (as covered in paragraph 12.2 of the Master Circular for Mutual Funds)

• Unrated debt instruments

• Structured Obligations (SOs) and Credit Enhancements (CEs)

• REITs and InVITs,

• And shall not engage in short-selling of securities.

The Investment Manager would monitor the tracking error & tracking difference of the Scheme on an ongoing basis and would seek to minimize the same to the maximum extent possible. Under normal circumstances, such tracking error is not expected to exceed 2% per annum. There can be no assurance or guarantee that the Scheme will achieve any particular level of tracking error/difference relative to the performance of the underlying index.

What Is the Investment Objective?

SBI Nifty 500 Index Fund's investment objective is to provide returns that correspond to the total returns of the securities as represented by the underlying index, subject to tracking error.

However, there is no guarantee or assurance that the investment objective of the scheme will be achieved.

What is the Investment Strategy?

To achieve the stated investment objective, the SBI Nifty 500 Index Fund will use a 'passive' or indexing approach and will track the Nifty 500 Index.

Unlike other funds, the Scheme will not try to 'beat' the market it tracks and will not seek temporary defensive positions when the market declines or appears overvalued. The scheme will primarily invest in the securities constituting the underlying index. The AMC shall not make any judgments about the investment merit of a particular stock or a particular industry segment nor will it attempt to apply any economic, financial or market analysis.

However, due to corporate action in companies comprising of the index, the scheme may be allocated/allotted securities which are not part of the index, which will be up to 5% of their total assets.

For example, the AMC may invest in stocks not included in the relevant underlying index to reflect various corporate actions (such as mergers) and other changes in the relevant Underlying Index (such as reconstitutions, additions, deletions and these holdings will be in anticipation and the direction of impending changes in the underlying index). These investments which fall outside the underlying index shall be rebalanced within 7 calendar days.

Indexing eliminates active management risks concerning over or underperformance vis-a-vis a benchmark.

As regards the derivative exposure, it will be for non-hedging purposes as permitted by the regulations from time to time and will be in line with the investment objective and overall strategy of the Scheme.

As mentioned earlier, the Scheme will benchmark its performance against the Nifty 500 Total Return Index (TRI).

About the Nifty 500 Index

The Nifty 500 represents the top 500 companies based on full market capitalisation and average daily turnover from the eligible universe.

Nifty 500 Index is computed using the free float market capitalization method, wherein the level of the index reflects the total free float market value of all the stocks in the index relative to the particular base period. The base date of this index is January 1, 1995.

At present, the top constituents of this index are as under:

Table: Top Constituents of the Nifty 500 Index

(Source: NSE Indexogram Factsheet as of August 2024)

The NSE 500 Index has representation to sectors such as financial services, information technology, oil, gas & consumable fuels, automobiles & auto components, FMCG, healthcare, capital goods, power, metals & mining, construction, consumer durables, and telecom among others.

Since its inception, the Nifty 500 Index has delivered a compounded annualised price return of 11.3% and a total return (which includes dividends) of 12.9% (as of August 30, 2024).

Over the last one year, the Nifty 500 Index has clocked a stellar absolute total return of 41.6% as of August 30, 2024, rewarding investors well.

Graph: Long-term Performance of Nifty 500 Index

(Source: NSE Indexogram Factsheet as of August 2024)

Particularly after the lows of the COVID-19 pandemic, the broader Nifty 500 Index which has stocks across the market capitalisation spectrum has delivered stunning returns.

Here's what Mr Shamsher Singh, MD and CEO, of SBI Mutual Fund said when speaking to the press:

"The SBI Nifty 500 Index Fund offers a comprehensive investment opportunity across India's economy. Investors seeking exposure to large, mid, and small-cap companies at a relatively lower cost can consider this fund."

Mr DP Singh, Deputy MD & Joint CEO, SBI Mutual Fund added:

"This fund gives investors access to established and growing businesses in one product. It provides exposure to over 92% of the total market capitalisation of listed companies, offering a broad sectoral and market-cap coverage."

Who Will Manage SBI India Nifty 500 Index Fund?

The Scheme will be managed by Mr Viral Chhadva. Viral joined SBI Funds Management Pvt. Ltd. (SBIFMPL) in December 2020 and has over 17 years of experience in financial services.

Before joining SBIFML, he was previously associated with IIFL Securities Limited (June 2008 till December 2020) and ICICI Securities Limited (June 2006 till June 2008) wherein he primarily handled the execution of trades into Direct Market Access, ETFs and derivatives.

Viral holds a Master's in Financial Management (MFM) and is a CFA Charterholder from the CFA Institute, USA.

At SBI Mutual Fund, Viral also manages the SBI Nifty50 Equal Weight Index Fund and SBI Nifty50 Equal Weight ETF.

How much is the Minimum Investment in SBI India Nifty 500 Index Fund?

During the NFO period, the minimum amount is Rs. 5,000/- per application and in multiples of Re. 1/- thereafter.

The minimum investment amount in the case of the daily Systematic Investment Plan (SIP) is Rs 500/- and multiples of Re. 1/- thereafter. The minimum number of instalments would be 12.

In the case of monthly, quarterly, semi-annual, and annual SIP the minimum investment required is as under:

• Monthly SIP - Minimum Rs. 1000 & in multiples of Re. 1 thereafter for minimum 6 months or Minimum Rs. 500 & in multiples of Re. 1 thereafter for minimum 12 months

• Quarterly SIP - Minimum Rs. 1500 & in multiples of Re. 1 thereafter for minimum 1 year

• Semi-annual SIP - Minimum amount of investment will be Rs. 3,000 and in multiples of Re.1 thereafter. The minimum number of instalments is 4.

• Annual SIP - Rs 5,000 and in multiples of Re.1. Minimum number of instalments is 4.

Who Should Consider Investing in the SBI Nifty 500 Index Fund?

The Nifty 500 Index is a broader index that has representation to various sectors and companies across large-caps, mid-caps, and small-caps.

Investors seeking exposure to these companies at relatively low risk with a passive investment approach can consider this Scheme. The returns of the Scheme would correspond to the returns of the Nifty 500 Index, subject to tracking error.

Currently, the Price-to-Equity (P/E) and Price-to-Book Value (P/BV) ratio of the Nifty 500 Index Fund is at around 28xx and 5x, respectively -- which cannot be considered cheap. The valuations of midcap and smallcaps, at present, particularly look stretched (much higher than the historical averages) and, therefore, are a concern. Going forward, if earnings do not meet market expectations or fall, it could weigh on the performance of the Nifty 500 Index.

Overall, one ought to have a very high-risk appetite and keep an investment horizon of at least 3 to 5 years to invest in the SBI Nifty 500 Index Fund.

To know more about the SBI Nifty 500 Index Fund, read the Scheme Information Document and Key Information Memorandum.

Make an informed investment decision and be a thoughtful investor.

Happy Investing!