DSP Mutual Fund Introduces India’s First Nifty Top 10 Equal Weight Index Fund & ETF

In a groundbreaking initiative, DSP Mutual Fund has introduced India’s very first Nifty Top 10 Equal Weight Index Fund and ETF. This innovative offering provides investors with a unique opportunity to invest equally in the top 10 Indian companies by free float market capitalization as listed on the Nifty Index. With a strategy rooted in equal weighting, this fund aims to leverage the relatively attractive valuations of the top 10 stocks compared to broader indices like Nifty 50 and Nifty 500.

Capitalizing on Valuation Opportunities

The DSP Nifty Top 10 Equal Weight Index Fund and ETF seek to capitalize on the current market dynamics where the top 10 stocks in the Nifty Index are trading at comparatively better valuations. These top-tier companies are evaluated based on key metrics such as the Price-to-Earnings (P/E) Ratio, Return on Equity (RoE), and Return on Assets (RoA). According to a release from DSP Mutual Fund, this strategic approach provides a margin of safety and positions the fund to potentially deliver superior returns over time.

Important Dates for the New Fund Offer (NFO)

The New Fund Offer (NFO) for the DSP Nifty Top 10 Equal Weight Index Fund and the DSP Nifty Top 10 Equal Weight ETF will open for subscription on August 16th, 2024. Investors have until August 30th, 2024, to participate in this offering. This period is crucial for investors looking to gain exposure to a diversified portfolio of India’s largest and most influential companies.

Historical Outperformance: A Proven Strategy

The Nifty Top 10 Equal Weight Index has demonstrated a strong track record of outperforming broader market indices. Over the past 16 years, this index has outperformed the Nifty 50 and Nifty 500 Indices in 9 out of those 16 years. This consistent performance underscores the potential of equal weighting as a strategy, particularly when the weight of the top 10 stocks as a percentage of total market capitalization is at an all-time low.

Potential for a Turnaround

While the top 10 stocks have underperformed other broader indices and active funds over the last four years, historical data suggests a potential for a turnaround. Specifically, when the three-year historical alpha is negative, the forward alpha for the Nifty Top 10 Equal Weight Index tends to be positive. This trend indicates that the current market environment may be ripe for a reversal, offering investors a compelling opportunity to capitalize on the anticipated recovery of these mega-cap stocks.

Superior Portfolio Quality

The Nifty Top 10 Equal Weight Index boasts a higher quality portfolio, with a Return on Equity that is 1.5 times greater than that of the Nifty 500 Index. This enhanced profitability is further highlighted by the fact that, based on FY 2024 data, nearly 49% of the profits generated by Nifty 50 stocks come from the companies in the Nifty Top 10 Equal Weight Index. This strong financial foundation positions the index to deliver sustainable returns over the long term.

Insights: The Case for Equal Weighting

Anil Ghelani, CFA, Head of Passive Investments & Products at DSP Mutual Fund, emphasized the strategic advantage of investing in large and mega-cap stocks at relatively attractive valuations. He noted, “While there has been growing interest in small and mid-cap stocks, the largest and mega-cap stocks currently present a more attractive valuation opportunity. Sound investing principles suggest that it is always better to invest where there is relatively lower valuation and a margin of safety.”

Ghelani further explained the rationale behind the equal weight strategy: “The Nifty Top 10 Equal Weight Index offers a balanced exposure to the largest companies, which not only helps in reducing drawdowns during market downturns but also has the potential to generate better returns over the long term.”

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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.