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DSP Nifty 50 Equal Weight ETF review: Why the scheme when an index fund already exists?

On days of extreme market volatility, the NAV of an ETF may not be able to closely track the price movement of the underlying index

October 19, 2021 / 10:33 AM IST

A month after Edelweiss converted two of its exchange-traded funds (ETFs) to index schemes, DSP Mutual Fund has done the opposite thing. DSP Nifty 50 Equal Weight ETF (DNEWE) is being rolled out nearly four years after it had launched an index fund based on the same theme. Given the rise in retail folios in ETFs, it makes sense to offer ETFs to investors, says the fund house. According to industry data collated by DSP, between March 2020 and March 2021, the number of retail folios in ETFs (other than gold ETFs) was up 126 percent. HNI folios are up 46 percent.

The scheme

DNEWE aims to mimic the performance of the Nifty 50 Equal Weight Index (NEW50).

As the name suggests, the index gives equal weightage – 2 percent – to each of the 50 stocks in the Nifty. This is what makes DNEWE different from investing in any regular Nifty 50-based fund.

What works

The stocks in Nifty 50 have different weights, linked to the market cap of the companies.

If the company’s stock price (and therefore market cap) has been seeing a run-up, its weightage increases and vice versa.

Close

As each company is given a 2 percent allocation, regardless of its market cap or stock performance, DNEWE offers a more diversified portfolio, with no concentration risks.

“Since you won’t know which stocks are likely to perform in future, through an equal weight strategy, you can diversify your weights equally and also spread out your risks,” says Vidya Bala, co-founder of primeinvestor.in

DNEWE, which tracks the NEW50 Index, may outperform the Nifty 50 when there is a broader market rally. An analysis of historical data done by DSP MF shows that NEW50 has done well during the post-crisis recovery as wider set of stocks participated in the rally.

From March, 2020, NEW50 gave 108 percent (up to March 23, 2021) return, while Nifty 50 has delivered 97 percent.

Similarly, NEW50 managed 95 percent returns between January 1, 2009 and January 1, 2010. The Nifty 50 could give only 73 percent in the same period.

The chances of the NEW50 index outperforming the Nifty 50 index are higher over a longer investment period.

In a five-year period, the chances of NEW50 outperforming Nifty 50 are 58 percent, whereas the figure falls to 49 percent over a three-year period, as per analysis done by DSP MF.

What doesn’t

DNEWE could underperform when markets are polarised as was the case in 2018 and 2019, when few index heavyweights led the gains for Nifty 50 index.

“In an equal-weighted strategy, you don’t participate heavily in the stocks that have been showing high momentum, as weights are limited. To that extent, such a strategy can underperform significantly, if only few Nifty stocks lead the markets,” Bala points out.

Anubhav Srivastava, partner and fund manager at Infinity Alternatives, says investors must remember that the returns of the fund are going to be heavily linked to the performance of the Nifty 50, even though the index weights would differ from that of the Nifty 50.

Also, as we have seen in the past, on days of extreme market volatility, the NAV movement of an ETF may not be able to closely track the price movement of the underlying index.

Moneycontrol’s take

Bottom line: Why is DSP MF bullish about ETFs, whereas its peer Edelweiss appears to be going the other way? “There are always some investors who prefer ETFs because they like all their investments in their demat account. With the proliferation of online stock brokerages over the past two years, many young investors want to invest via the stock exchanges in ETFs and consolidate their investments in their demat accounts. The liquidity of ETFs on the exchanges has been improving and, besides, if you are investing for the long term, the intermittent low liquidity on some days would not bother you,” says Anil Ghelani, Head-Passive Investments & Products, DSP Investment Managers.

The DSP Nifty 50 Equal Weight ETF may do well when a broader set of Nifty stocks participate in a market rally, but even then the outperformance may not necessarily be large.

Taking a call on how the constituents of the Sensex or Nifty might move may not always work in your favour.

An equal weight index fund or ETF can be viewed as an alternate way to investing in a traditional index fund. If you invest in passively-managed funds and wish to stick to the basic large-cap indices, then an equal weight index can be an alternative- and an equally compelling one- to the traditional market-cap indices. Just be sure you understand under what market conditions one outperforms or underperforms the other.

With the DSP Nifty 50 Equal Weight ETF, your choice of investing in the index fund or the ETF boils down to what mode you’d like to hold your units in – demat or regular mode. The NFO is open till October 29, 2021.
Jash Kriplani is a journalist with over ten years of experience. Based in Mumbai. Covering mutual funds, personal finance. His last stint was with Business Standard, where he covered mutual funds and other developments in the financial markets
first published: Oct 19, 2021 09:55 am

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