UTI MF has launched its Nifty 500 Index Fund at a time when there is growing consensus that the broader market offers much better long term opportunities than the old favourite Nifty 50 Index.
Sharwan says Nifty 50’s representation of the market has gradually reduced from over 60% to only 43% today, as more companies get listed and the market continues to expand.
By contrast, Nifty 500 represents 90% of total market –making it a lot more representative of the Indian equity market. With 70% largecap, 20% mid cap and 10% small cap weights, it is well balanced in terms of providing stability from larger companies and faster growth prospects from smaller ones.
Interestingly over the last 27 years, Nifty 500 has delivered over 14.9% CAGR while Nifty 50 delivered around 13.3% - and both experienced the same level of volatility – making Nifty 500 a better risk adjusted investment option.
That 1.6% difference over 27 years has led to a sharp difference in the compounded outcome. One rupee invested in Nifty 50 27 years ago is worth Rs.29 today but the same amount invested in Nifty 500 is over Rs.43 today.
For investors wanting a passive fund at the core of their portfolio to give proper market representation, Nifty 500 Index Fund is clearly a better choice compared to Nifty 50 Index Fund.
Sharwan says a good passive oriented portfolio strategy would be to have Nifty 500 Index Fund at the core and a bouquet of sectoral, thematic and smart beta funds as satellite holdings – provided of course that the investor has experience and knowledge of markets to discern satellite opportunities from time to time.
While Nifty 50 Index Fund and Sensex Index Fund continue to be the largest within the passives AuM, Sharwan is seeing a lot of traction from retail investors coming into smart beta and sectoral funds.
Among smart beta, momentum based strategies are the clear favourite currently among investors.
Passive funds are already over 18% of industry AuM and Sharwan believes that if we evolve the way Western markets like US have done, we could see passives continuing to grow by size and market share in the years ahead. US today has over 50% AuM from passive funds.