Last Updated on August 22, 2022 at 11:29 pm
The return difference (over two years and above) between Nifty 50 and Nifty 50 Equal-Weight Indices is at an all-time high. The corresponding number for Nifty 100 vs Nifty 100 Equal-Weight is close to its all-time high! We analyse how past return differences correlate with market movements.
To understand what we are discussing, let us consider every possible two-year returns of the NIfty 50 (N50) and Nifty 50 Equal-Weight (N50EW). The dates below correspond to the end date of the 2Y period.
Over the 3725 returns possible for each index, notice the returns in the white oval. The N50EW returns have never dropped so much below the N50 returns in the past.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
This can be seen better by plotting N50EW-N50 (2Y returns), that is the return difference and the Nifty 50 movement.
Notice how sharply the return difference fell after late 2017. The current N50EW-N50 difference is the lowest for all return durations two years and above. This immediately begs the questions if the trend reverses, and it must, sooner than later, will the Nifty fall? Or will the bottom 80-85 stocks of the NIfty move up?
From Feb 2005 to Nov 2007, the longest monotonous fall in N50EW-N50 corresponding to a bull-run (overall), terminated by the 2008 crash. During this period, the midcap and smallcap indices moved up faster than the Nifty.
The current fall in N50EW-N50 from Sep 2017 is fundamentally different as it corresponded to a fall in midcap and smallcap stocks. It is hard to draw inferences from these but is clear that the current state of the market seems to be quite different from what we have witnessed at least in the recent past.
The corresponding graphs for NIfty 100 and NIfty 100 Equal-Weight indices are shown below.
Notice that the N100EW has fallen significantly below N100 since Sep 2017. The N100EW-N100 return difference over two years is close to its all-time low just around the 2008 crash. Again it is incorrect to read too much into these graphs.
The fortunes of Nifty Next 50 has also reflected that of Nifty 100 Equal-Weight index.
To understand the origin of this return difference, we need to look at individual stock movements. The last two year returns of Nifty 100 stocks is plotted against their weight in the Nifty 100.
The fortunes of NIfty 50 and NIfty 100 are determined by the same top 10-15 stocks. Notice these have done well in the last two years. Many other stocks outside the top-15 have also done well, but their weights are too small to make a difference.
An equal-weight index, unfortunately, will be equally influenced by stocks with the highest return and lowest return. The standard deviation or a measure of fluctuating daily prices is shown below.
The top 15 stocks of Nifty 100/Nifty 50 have exhibited the least volatility over the last two years. This behaviour triggered the former Chief Economic Adviser Arvind Subramanian to say “explain to me why as the economy is going down and down and down” while addressing members of the Indian Institute of Management Ahmedabad
The reasons for this is hard to speculate and harder to find universal acceptance. However, a disparity among the movement of NIfty 100 stocks is not new. In fact, a uniform movement of all index stocks may not be good news too.
Between Aug 2011 to Sep 2017, N50EW-N50 2Y return difference was hovering around 0% with some sharp dips and a spike. This period saw some spectacular up and downward movements. The Feb 2016 fall caused panic among members of Facebook Group Asan Ideas for Wealth.
It seems extraordinary that the number of new market participants sky-rocketed after the early 2016 fall especially from tier 2 and 3 cities. Things are changing so much so fast that the Nifty pre-2008 crash is not the NIfty that we see today. A study of NIfty PE reveals how the long-term average has changed over the last few years. See: Is the market overvalued?
Given the disparity in the movements of large cap and mid, small cap stocks over the last couple of years, we can only intuitively expect the N50EW-N50 return-difference to change direction. No one can say when and how. All we can do is, take a moment to appreciate the fact that we seem to be in uncharted waters.
We had pointed out in the Mirae Asset Large Cap Fund Review that the N50EW-N50 return difference can be used to find out if active large cap fund managers can still beat the market. Investors in active large cap funds can track this return difference to check if there is a positive change in the fortunes of their funds when the trend changes.
This begs the question if active fund managers are finding the going tough only because the market is dominated by just a few stocks. While we will consider that in a separate study, the absence of alpha has been reported years ago: This will change the way you invest: S&P Index Versus Active Funds report
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)