Nifty500 Multicap 50:25:25 Index Review

Published on / By M. Pattabiraman Twitter: @pattufreefincal

Published: December 4, 2020 at 3:53 pm

Last Updated on December 29, 2021

To aid active multi-cap funds to benchmark themselves after SEBI changed their asset-allocation pattern, NSE has launched a new index from Dec 2nd 2020, the Nifty500 Multicap 50:25:25 Index. In this article, we review the performance of this index. Since the index is new, the entire historical data  (from 1st April 2005) is based on a backtest).

The index is essentially a mixture of three indices: 50% of Nifty 100 plus 25% of Nifty Midcap 150 and 25% of Nifty Smallcap 250 TRI. The 500 stocks of Nifty500 Multicap 50:25:25 Index would be identical to Nifty 500, but the weights would be considerably different.

For example, according to the Dec 2020 Factsheet (based on Nov-end data) the top-ten stocks of Nifty500 Multicap 50:25:25 Index are given below. The percentages within brackets (red) denote the corresponding weightage in Nifty 500. It is clear that the concentration risk is considerably lower in this weighted index.

  1. HDFC Bank Ltd. 4.81% (7.86%)
  2. Reliance Industries Ltd. 4.79% (7.83%)
  3. Housing Development Finance Corporation 3.10% (5.07%)
  4. Infosys Ltd. 3.09% (5.06%)
  5. ICICI Bank Ltd. 2.51% (4.10%)
  6. Tata Consultancy Services Ltd. 2.16% (3.53%)
  7. Kotak Mahindra Bank Ltd. 2.14% (3.50%)
  8. Hindustan Unilever Ltd. 1.47% (2.40%)
  9. ITC Ltd. 1.30% (2.12%)
  10. Axis Bank Ltd. 1.14% (1.87%)

We shall now proceed to compare the index movement with other prominent benchmarks.

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    Nifty500 Multicap 50:25:25 TR vs Nifty 50 TRI

    Nifty500 Multicap 50-25-25 TR Index vs NIfty 50 TRI Since 1st April 2005
    Nifty500 Multicap 50-25-25 TR Index vs NIfty 50 TRI Since 1st April 2005

    Nifty500 Multicap 50:25:25 TR vs Nifty Next 50 TRI

    Nifty500 Multicap 50-25-25 TR Index vs NIfty Next 50 TRI Since 1st April 2005
    Nifty500 Multicap 50-25-25 TR Index vs NIfty Next 50 TRI Since 1st April 2005

    The multicap index movement is quite close to that of NIfty Next 50 TRI (when viewed from 1st April 2005) and has pulled away from the Nifty 50 TRI only during the 2013-2017 bull run.

    These are indices that make up the multicap index.

    Nifty500 Multicap 50-25-25 TR Index vs NIftyMIdacap 150 TRI vs NIfty Small Cap 250 TRI vs Nifty 100 TRI Since 1st April 2005
    Nifty500 Multicap 50-25-25 TR Index vs NIftyMIdacap 150 TRI vs Nifty Small Cap 250 TRI vs Nifty 100 TRI Since 1st April 2005

    Rolling returns of the multicap index (yellow); Nifty 100 TRI (white) and Nifty 50 TRI (brown) are shown below for five and ten years. This just means we look at every possible 5Y and 10Y returns bet 1st April 2005 and Dec 3rrd 2020. The number of such data points in each coloured line is indicated within each image.

    Five year rolling returns of Nifty500 Multicap 50-25-25 TRI with Nifty 50 TRI and Nifty 100 TRI
    Five-year rolling returns of Nifty500 Multicap 50-25-25 TRI with Nifty 50 TRI and Nifty 100 TRI
    Ten year rolling returns of Nifty500 Multicap 50-25-25 TRI with Nifty 50 TRI and Nifty 100 TRI
    Ten-year rolling returns of Nifty500 Multicap 50-25-25 TRI with Nifty 50 TRI and Nifty 100 TRI

    Over 10 years, the likelihood of the multicap index outperforming Nifty 50 and Nifty 100 is higher; over five years it is pretty much a coin-toss. If we repeat the exercise with Nifty Next 50, Nifty Midcap 150 and Nifty Smallcap 250, we see that there is not much of a difference bet the multicap index and Nifty Next 50.

    Five year rolling returns of Nifty500 Multicap 50-25-25 TRI with Nifty Midcap 150 TRI and Nifty Smallcap 250 TRI and Nifty Next 50 TRI
    Five year rolling returns of Nifty500 Multicap 50-25-25 TRI with Nifty Midcap 150 TRI and Nifty Smallcap 250 TRI and Nifty Next 50 TRI
    Ten year rolling returns of Nifty500 Multicap 50-25-25 TRI with Nifty Midcap 150 TRI and Nifty Smallcap 250 TRI and Nifty Next 50 TRI
    Ten-year rolling returns of Nifty500 Multicap 50-25-25 TRI with Nifty Midcap 150 TRI and Nifty Smallcap 250 TRI and Nifty Next 50 TRI

    Once again the futility of investing in a small cap index is seen above. Also see: Nippon India Nifty Smallcap 250 Index Fund: Can I add this to my passive portfolio?

    Next, we compare the five and ten tear rolling risk or standard deviation of the multicap index with Nifty 50 and Nifty Next 50. The volatility of the hybrid index is similar to Nifty 50 TRI

    Five year rolling risk (standard deviation) of Nifty500 Multicap 50-25-25 TRI with Nifty 50 TRI and Nifty Next 50 TRI

    Ten year rolling risk (standard deviation) of Nifty500 Multicap 50-25-25 TRI with Nifty 50 TRI and Nifty Next 50 TRI
    Ten-year rolling risk (standard deviation) of Nifty500 Multicap 50-25-25 TRI with Nifty 50 TRI and Nifty Next 50 TRI

    In summary, the new Nifty500 Multicap 50:25:25 Index has a risk profile close to Nifty 50 and a reward profile close to Nifty Next 50. Passive fans should not expect an index fund tracking this. This was meant for the new type of multicap funds to benchmark themselves. In any case, it is not necessary: Combine Nifty & Nifty Next 50 funds to create large, mid cap index portfolios

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