The NIFTY 100 Equal Weight Index As a Mutual Fund Benchmark

Published: February 14, 2017 at 9:41 am

Last Updated on October 8, 2023 at 1:38 pm

Most stock market indices widely used in India are what are known as market capitalization weighted indices. That is, higher the total market value of a stock, higher its presence (weight) in the index. The Nifty 100 Equal weight index is one in which all the stocks of the Nifty 50 and Nifty Next 50 are found in equal measure. In this post, I discuss how this index can be used as a mutual fund benchmark.

The market capitalization is defined as the current market price x no of shares outstanding. Most indices only consider the shares that can be actively traded. This is known as the free float market capitalization (cap).

Well established companies would have (typically) a higher market cap than younger companies. So in a market-cap weighted index, the stocks with the higher cap will get a bigger share of the index.  Therefore the returns also will be determined in large part by such stocks.

In an equal weight index, all the stocks have the same weight (1% if there are 100 stocks) regardless of their market cap.


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Each index has its pros and cons.

In a market-cap weighted  (MCW) index, the less volatile large-cap stocks would dominate. In an equal-weighted  (EW) index, the mid-caps (relatively) will have a higher say in returns and risk.

The MCW index is expected to be less volatile, but will have a higher concentration risk. Since just a few stocks would comprise more than half the index, if they fail, so will the index.

The EW index is better diversified from the point of view of concentration. However, it will have more of volatile mid-caps. However, the periodic (twice a year) rebalancing should take of this to some extent (more on this later).

It is very easy to look at graphs such as this and conclude that the Nifty 100 Equal Weight is better than the plain Nifty 100. However, what we do not see here is the volatility.

The Nifty Next 50 (bottom 50 stocks in Top 100, excluding Nifty 50) and the Nifty Midcap 100 Free Float indices are shown for comparison. You can see that the Nifty 100 Equal Weight combines the qualities of a large-cap index and a mid-cap index.

This makes the Nifty 100 Equal Weight Index a great benchmark for the multi-cap category.

Sundaram AMC has just launched an index fund that tracks this. MOST has an ETF. Value Research considers such funds as large caps. This is incorrect in my opinion. They are multi-cap funds.

Value Research considered funds that track the Nifty Next 50 as multi-cap funds. While this is debatable, I had earlier shown that the Nifty Next 50 is the index to watch out for when it comes to passive funds trumping active funds: Evaluating the Nifty Next 50 as an Index Fund.

Index SIP and lump sum returns

Here is a list of index SIP and lump sum returns. What do you make of this?

Comparison with funds in the multi-cap category

The top panel is the comparison with Nifty Next 50. Most funds have failed to beat this index. Makes you wonder if it is too harsh a comparison!

The bottom panel is the comparison with Nifty 100 Equal-weight. About 50-70% of funds have beat this index. So the EWI is yet another promising index to watch out for.

Comparison with funds in the mid-cap category

If we compare both these indices with the mid-cap funds, we find that the Nifty Next 50 is perhaps more suitable as a benchmark for this category than the Nifty 100 Equal Weight. And it is important to keep in mind that these are price indices excluding dividends (though perhaps small compared to large caps).

Important: While the Nifty Next 50 (previously known as the Nifty Junior) is a well-established index, the Nifty Equal Weight index does not seem to have any actual trading data, although it was launched in 2013. Wonder why? So future (actual) performance may not resemble the past.

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