DSP is launching an index fund and ETF tracking the Nifty Top 10 Equal Weight Index. We look at the features of this index and discuss if it makes sense to invest in these new offerings.
The Nifty Top 10 Equal Weight Index tracks the performance of the top 10 stocks based on the 6-month average free-float market capitalization from the Nifty 50. On the face of it seems like a good idea. After all, the top 10 stocks of Nifty 50 account for more than 50% of the total weight (56% currently). So buying just the top 10 stocks seems like a high-risk (due to concentration) high-reward proposition.
These are the top ten stocks of Nifty 50 as of July 2024.
| Stock | Weight |
| HDFC Bank Ltd. | 11.03 |
| Reliance Industries Ltd. | 9.23 |
| ICICI Bank Ltd. | 7.75 |
| Infosys Ltd. | 6.12 |
| ITC Ltd. | 4.15 |
| Larsen & Toubro Ltd. | 4.04 |
| Tata Consultancy Services Ltd. | 4.03 |
| Bharti Airtel Ltd. | 3.62 |
| State Bank of India | 3.04 |
| Axis Bank Ltd. | 3.01 |
These are the top 10 stocks of the Nifty Top 10 Equal Weight Index Fund as of July 2024.
| Stock | Weight |
| Infosys Ltd. | 11.4 |
| ITC Ltd. | 11.01 |
| Tata Consultancy Services Ltd. | 10.75 |
| Hindustan Unilever Ltd. | 10.47 |
| Larsen & Toubro Ltd. | 10.01 |
| Reliance Industries Ltd. | 9.74 |
| Kotak Mahindra Bank Ltd. | 9.55 |
| ICICI Bank Ltd. | 9.54 |
| HDFC Bank Ltd. | 8.89 |
| Axis Bank Ltd. | 8.63 |
The Nifty Top 10 Equal Weight Index Fund was launched only on June 24th 2024, with backtested data up to March 2nd 2006. This means the historical data is too short to draw any meaningful conclusions about the efficacy of this index “over the long term”.
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This is the since inception comparison of the index with Nifty 50 TRI
Do not be distracted by the recent outperformance. Focus on the performance in the first six years.
Buying only the top 10 stocks of Nifty 50 in equal weights did not work for the first six years since inception. This suggests that the performance of Nifty 50, determined by its top 10 stocks, is a recent phenomenon. How long would this last?
Would you be patient if, after investing in the DSP Nifty Top 10 Equal Weight Index Fund or ETF, you get poor returns compared to a Nifty 50 index fund? (Remember, fees have to be accounted for).
The presentation document from the fund house has this slide.
The top 10 index underperformed for the first 15 years in the graph above. This again shows that the top 10 domination in a broad market index is a “recent” phenomenon. And like all phenomena, it may not last forever, especially after you commit money in the fund!
There is not much history to look at the rolling returns data. For what it is worth, this is it.
There is not much difference between the two indices over five years (we have only data over the last ten years). It will be even lower, considering tracking errors and fees.
Over ten years, the top 10 index has done well, but we must keep in mind we only have data over the last six years or so, and the margin of outperformance has been down recently. So it is best to keep expectations low.
In summary, we find no compelling reason to invest in the DSP Nifty Top 10 Equal Weight Index Fund or ETF. Like everything else in the market, the outperformance of the top stocks is bound to be cyclic and could occasionally frustrate investors who compare their performance with Nify 50. It is simple to invest in a simple Nifty 50 or Sensex index fund (not ETF, that is for trading).