UTI Nifty 50 Equal Weight Index Fund NFO: Should you invest?

Index Funds

The UTI Nifty 50 Equal Weight Index Fund (UNE50) is an open-ended scheme replicating or tracking NIFTY50 Equal Weight Total Return Index (NE50). Put simply, this scheme will attempt to offer returns in line with the underlying index before accounting for expenses and tracking error.

Sharwan Kumar Goyal will be managing this scheme. The index allocates an equal amount of money (2 percent) to each stock in Nifty 50. The weightage is rebalanced every quarter.

What works?

The index consists of Nifty 50 stocks. These are large companies with an established track record. For those who wish to stay away from small and mid-sized companies, where you could end up investing in companies or management with little or no track record, this sort of a large-cap fund offers solace. It also reduces your portfolio’s volatility because large and well-established companies are among the least volatile on the stock markets.

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As all stocks are equally represented in the NE50, investors are relatively less exposed to sectoral or stock-specific concentration risk. For example, the Nifty 50 index has 37 percent allocation to the financial sector, whereas in case of Nifty equal weight 50 the same gets capped at 22.63 percent. Since each stock’s weight is capped at 2 percent at the end of each quarter, the profits are booked periodically.

When the equity markets see a broad-based rally, the equal weight index typically does better than the market cap-based Nifty 50 index.

Abhay Mathure, a Mumbai-based mutual fund distributor, is of the opinion that NE50 can be a better bet than investing in Nifty 50. “If a stock with a large weight in Nifty 50 underperforms, the index returns suffer. However, that is not the case with NE50 as all stocks are equally represented,” he says.

What does not work?

If a particular sector or a handful of stocks, with large allocation in Nifty, are doing well, the Nifty 50 tends to do better than the NE50. Quarterly rebalancing ensures that the winners are trimmed from time to time and relatively less-performing companies are bought.

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The churn of the portfolio of NE50 tends to be higher than that of the Nifty 50 index.

While considering index investing, Nitesh Buddhadev, founder of Nimit Consultancy, prefers to stick to index funds which track time-tested indices, based on market capitalisation over equal weight strategy. “Indexing in market cap-based index is akin to momentum investing wherein we invest more in stocks doing well. Also, equal weight index tend to charge more than the Nifty 50 index,” he adds.

What should you do?

Over the last three and five years ended June 1, 2023, DSP Nifty Equal Weight Nifty 50 index fund (the oldest scheme tracking NE50 index) has given 28.65 percent and 11.76 percent, respectively. Compared to this, large-cap equity funds have given 23.36 percent and 11.56 percent, respectively, as per Value Research data.

Nippon India ETF Nifty BeES that tracks Nifty 50 index has given 24.81 percent and 12.82 percent, respectively, over the same period of time.

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For all those who want to avoid fund manager risk and are still looking for something better than a traditional passive investing approach, this strategy with equal allocation to Nifty 50 constituents may find it interesting. While selecting an index fund, you should pay heed to the expense ratio and the tracking error. Lower the better it is for the investor.

UNE50 is not the first of its kind. Other fund houses, like Aditya Birla Sun Life, HDFC, ICICI and DSP, offer it as well. Even if you are keen to invest in the equal weight strategy, ideally opt for a systematic investment plan to reduce timing risk.