The severe economic shock that has been caused by pandemic led to a lockdown, with stocks around the world melting down. Even though the Nifty 50 has recovered 20% from the March 2020 lows, it is still down by almost 25% when compared to a year to year basis. Infections and fatalities are also rising in the country, and the roadmap to normalcy is now uncertain. In such a scenario, stock-specific risks are substantial in the country.
A lot of financial investors are now recommending index funds as a good investment option to increase asset allocation in equities, and take advantage of the eventual recovery in stocks.
The Principal Nifty 100 Equal Weight Fund
The Principal Nifty 100 Equal Weight Fund invests in the 100 largest stocks in the same proportion. The objective of the scheme is to replicate the performance of the Nifty 100 Equal Weight Total Returns Index. A major advantage of the fund is that it does not need any active management, and its costs are also much lower as compared to other actively managed diversified equity schemes. The expense ratio of the scheme stands at 0.96%. ultimately, over long investment horizons, lower expenses lead to substantially higher returns, thanks to the compounding effect. The scheme also aims to provide long term capital appreciation which is in line with the market index returns.
What is the Nifty 100 Equal Weight Index?
The Nifty 100 Equal Weight Index comprises of the top 100 stocks by market capitalization and invests equal amounts, which is 1 percent of the portfolio value, in each stock. As per the market capitalization definition by SEBI, these top 100 stocks by market capitalization are classified as large-cap stock. Every quarter, the portfolio is rebalanced, to readjust the proportion of each stock in the portfolio back of 1 percent if the portfolio value.
The benefits of Nifty 100 Equal Weight Index
- The Nifty 100 Equal Weight Index comprises of only large-cap stocks. These large-cap companies have stronger balance sheets and greater market shares when compared to other small companies. These are also less adversely affected by economic downturns as compared to smaller companies.
- With 100 stocks, the Nifty 100 Equal Weight Index is much more diversified as compared to the smaller number of stocks which are held by Nifty or Sensex.
- Sensex and Nifty are both market cap-weighted indices. Stocks that have higher market capitalizations are given much more weight in market cap-weighted indices. On the other hand, the Nifty 100 Equal Weight Index gives equal weightage to each stock in its index. Market cap indices, as well as equal weight indices both, have their pros and cons. One of the biggest advantages of an equal weight index is a lower concentration risk when compared to its counterparts.
- Defensive sectors such as FMCG and pharmaceuticals usually outperform in economic downturns. These have a higher allocation in the Nifty 100 Equal Weight Index as compared to Nifty. Allocation to these sectors is around 24% in the Nifty 100 Equal Weight Index as compared to 16% in Nifty. Allocation to pharma, which will surely outperform and sail through the current situation, is 9% in the Nifty 100 Equal Weight Index versus the 2% in Nifty.
- Sensex and Nifty do comprise the largest of the large-cap companies, which are often known as blue-chip companies. The Nifty 100 Equal Weight Index, on the other hand, includes these blue-chip companies as well as other relatively smaller companies. The size of the smaller companies within the large-cap segment is smaller than the largest companies that make up the Nifty or Sensex. In the long term, these stocks have the potential to generate higher earnings per share growth as well as higher returns.
Nifty 100 Equal Weight Index versus Nifty
In the last seventeen years, Nifty 100 Equal-Weight TRI has managed to outperform Nifty 50 Tri. Had INR 10,000 been invested in both for 17 years, they would have grown to INR 1.37 lakhs in Nifty 100 Equal Weight Index as compared to INR 1.06 lakhs in Nifty.
Nifty 100 Equal-Weight Index-SIP
The Principal Nifty 100 Equal-Weight fund combines the dual advantages of mutual fund investments like investments through SIP, STP, etc with that of low-cost index investing.
With a cumulative investment worth INR 20.8 lakhs, the market value of your SIP in Nifty 100 Equal-Weight TRI would have grown to INR 58 lakhs, while in Nifty 50 TRI, it would have been 55.5 lakhs.
Over the last seventeen years, the annualized SIP return for Nifty 100 Equal-Weight TRI stood at 10.84%
Principal Nifty 100 Equal Weight Fund versus Benchmark
The purpose of index funds is not to beat the benchmark index. Their aim instead is to give returns in line with the benchmark returns. Therefore, one important performance measure of index funds is tracking error, that is how closely it can track the index.
Why should you invest in the Principal Nifty 100 Equal Weight Fund?
- Large-cap stocks have fallen by nearly 30 percent from their all-time high. Currently, they are trading at attractive valuations. And as per historical data, current valuations are a good platform from which you can get good returns over long investment tenures.
- The lockdown and pandemic have caused a high degree of uncertainty concerning the outlook of individual stocks. Therefore, index funds are a good investment option that will give benefits from the eventual recovery of equities.
- Nifty 100 Equal Weight Index has multiple advantages over other popular indices.
- In the long investment horizon, the Nifty 100 Equal Weight Total Returns has created large wealth for its investors.
- The Principal Nifty 100 Equal Weight Fund has much lower costs and tracking errors, which are good attributes for any index fund.
- You can invest in this fund either in a lump sum or through SIPs or STPs, as per your financial needs and situations.
Who should invest in this scheme?
- Investors who have moderately high to high-risk appetites
- Investors who want market returns and also want to avoid stock-specific risks
- Investors who have an investment horizon of at least 5 years
Investors who are impressed with the fund should consult their financial advisors about the feasibility of this fund for their investment needs.