Ignore short-term gyrations. Here are five simple index funds for long-term wealth creation
Don’t be swayed by short-term gyrations, stick to your asset allocation and focus on long-term goals. Here are five passively managed index funds each from the mega, large, mid, small and microcap segments can help you get better returns over the long run
Indian equity markets plummeted on June 4 due to increased volatility as election results showed a close fight between the NDA and the INDIA bloc. As this could lead the incumbent Bharatiya Janata Party (BJP) to rely on alliance partners to return to power for a third time, investors got jittery. Experts advise investors not to be swayed by short-term gyrations, and want them to focus on long-term investment goals. In this backdrop, we list five passively managed index funds. These schemes are tracking Nifty 50, Nifty Next 50, Nifty Midcap 150, Nifty Smallcap 250 and Nifty Microcap 250, respectively. Investment in a combination of these funds can help you get better returns over the long run.
Investors should have asset allocation in place based on their financial goals and risk profile. Investors with a low- to medium-risk profile are advised to ignore the small and microcap funds, as they belong to the high-risk category. Considering the current volatility in the market, it is advisable to invest in a staggered route through systematic investment plans. The minimum investment horizon should be 10 years or more.
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Why index funds?
Index funds are passively managed mutual funds (MFs) that try to replicate the performance of the underlying benchmark. These funds do not require a high level of intervention from fund managers. They just imitate the portfolio of an index, say Nifty 50, by investing in stocks that are a part of the index in the same proportion as in the index. Exchange traded funds (ETFs) are the other variant of passively managed MFs. Passive funds score over actively managed funds on lower expense ratio and nil fund manager risk. Index funds are suitable for those new to equity investing. Investors looking at market-linked returns, reduce the chances of underperformance and not wanting fund manager’s involvement can consider index funds. Index funds with low Tracking Error (TE) and low expense ratio are preferred investment products. Below are the funds.
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Nifty 50 Index Funds
• Nifty 50 Index (N50) is one of the best market representatives of the Indian markets. • It is the largest traded index in India and among the top-traded indices in the world. • It represents the weighted average of 50 of the largest Indian companies listed on the NSE. • It represents about 59% of the free-float market capitalisation of the stocks listed on NSE, as on September 29, 2023. • Top funds: UTI Nifty 50 Index Fund and HDFC Index Fund-NIFTY 50.
• The Nifty Next 50 Index (NN50) represents 50 companies from Nifty 100, after excluding Nifty 50 companies. • NN50 stocks are emerging bluechips and NN50 is an incubator for the Nifty 50, as many of these companies eventually graduate to Nifty 50. • Over the long run, NN50 has outperformed Nifty 50. • NN50 is more diversified and has lesser concentration risk across stocks and sectors than N50. NN50 often has a few mid-cap stocks as well, which typically make up 8-10% of the portfolio. • Top funds: ICICI Pru Nifty Next 50 Index Fund and DSP NIFTY Next 50 Index Fund
• These funds aim to measure the performance of mid-market capitalisation companies. • Nifty Midcap 150 represents the next 150 companies (companies ranked 101-250), based on full market capitalisation from NIFTY 500. • Mid-cap stocks are aptly positioned in the growth phase of the business cycle. • It has a differentiated sector exposure than large-cap indices. • Mid-cap indices have outperformed the large-cap counterparts over the long run. • Top funds: Nippon India Nifty Midcap 150 Index Fund and Motilal Oswal Nifty Midcap 150 Index Fund
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Nifty Smallcap 250 Index Funds
• These funds intend to measure the performance of small market- capitalisation companies. • Nifty Smallcap 250 represents 250 companies (companies ranked 251-500) from Nifty 500. • Many smallcaps are growing to become mid or largecaps, presenting an opportunity for investors to benefit from this upward migration. • It enables investors to participate in emerging businesses that are unavailable in the large-cap space. • It provides access to unique companies with emerging themes, such as auto components, hospitality, capital markets and chemicals. • Top funds: Nippon India Nifty Smallcap 250 Index Fund and SBI Nifty Smallcap 250 Index Fund
• The Nifty Microcap 250 index aims to track the performance of microcap stocks listed or permitted to trade on NSE. • The index includes the top 250 companies beyond the Nifty 500 index constituents, selected on the basis of their average full market capitalisation. • The stocks are selected from the bottom three percent of the stocks’ universe, in terms of market capitalisation in the exchanges. • They are uncovering investment opportunities, presenting exposure to unique and emerging themes. • Small firms have historically offered higher returns compared to its large-cap counterparts, albeit with much higher risk. • However, microcaps have historically seen a drawdown for a longer period than smallcaps and largecaps. • Top Fund: Motilal Oswal Nifty Microcap 250 Index Fund
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Which is the best? Nifty 500 or Nifty total market or Combination of five index funds
S&P BSE 500 Index, Nifty 500 Index and Nifty Total Market Index are the broad- based indices in India that cover the maximum universe of stocks, holding 500, 500 and 750 stocks, respectively. Though these indices cover almost all segments, it’s not as simple as it looks. Allocation in every segment has been disproportionate, as they are built based totally on the market capitalisation of the stocks. For instance, the weight of the Nifty 50, Nifty Next 50, Nifty Midcap 150, Nifty Smallcap 250 and Nifty Microcap 250 stocks in Nifty 500 was 59%, 14%, 17%, 10% and nil, respectively as of April 2024. Meanwhile the weight of those segments in the Nifty Total Market Index was 57%, 14%, 16.5%, 9% and 3.4%, respectively. As far as the stocks and sectoral compositions are concerned, all the five index funds complement each other. Hence, index funds tracking each segment can be part of one's portfolio.
