Think largecap investing, think Exchange Traded Funds
Investing in ETFs tracking Nifty50, including Nifty50 Value 20, provides long-term stability and tax efficiency. Large Cap ETFs use market capitalization to minimize risks, with periodic rebalancing for optimal performance. Brokerage platforms facilitate investments, supporting margin trading. These strategies leverage blue-chip stocks, particularly beneficial in broad-based or bull markets, with dividend yield enhancing stock selection.
Blue-chip stocks are like family treasures. Stocks of well-known companies should be kept for the long term, ideally to pass down to the next generation. The Nifty50 index houses some of these top-notch companies. Investments in units of an exchange traded fund (ETF) that tracks Nifty 50 index make a bedrock for a long-term equity portfolio.Large Cap ETF: why and how
Investing in large cap stocks for long term directly or through an actively managed mutual fund with a view to beat the market is a tough call, is a tough task. As these stocks are widely tracked by analysts, the chance of outperforming the benchmark Nifty 50 index is low. As per SPIVA India scorecard, S&P BSE 100 index has beaten 87.5% and 85.71% of the actively managed large cap equity schemes in India, over three and five years ended December 31, 2023, respectively.
Given these facts, it is better to earn closer to index returns, than to run the risk of significantly underperforming the index. An index ETF tracking Nifty 50 index makes sense for most investors. Companies entering the Nifty50 index have a proven track record. Many of these have strong balance sheets. Investors can expect them to continue with their good performance. Nifty 50 index is constructed using free float market capitalisation. Hence, relatively large companies by free-float market capitalisation get large weights in the index. Free float market capitalisation is computed by multiplying the number of non-promoter shares by the market price of the share. However, the market price of the share need not be the true worth of the stock. Hence, some investors frown at the methodology. Such investors may prefer other strategies devised using the constituents of Nifty 50 index.
Variants of Nifty 50 index
A simple strategy is to allocate 2% weight to each constituent of the Nifty 50 index. The performance of this strategy is measured by Nifty 50 equal weight Index. Here all constituents of Nifty 50 are given the same weight, and the index is rebalanced twice a year. Though the constituents are the same as the mother index (Nifty 50 index), the weights may differ a lot. For example, as on June 28, 2024, Reliance Industries had a 9.98% weight in Nifty 50 index, but the same stock is given a weight of 2.13% in the Nifty 50 Equal Weight Index.
Another strategy which has worked for many investors is Nifty50 Value 20. This strategy picks 20 attractively valued stocks from the constituents of Nifty50 index. Stocks are selected based on their return on capital employed, price to earnings ratio, price to book ratio and dividend yield. Index is rebalanced annually.
Source: Niftyindices.com, Data as on 28 June 2024.
A look at the above table gives an idea of the risk and returns offered by these three indices.
The Nifty50 equal weight index can be rewarding during a broad-based rally in the stock market. In a bull market, the stocks with relatively low weight in the Nifty 50 index tend to perform better than their bigger counterparts. However, the Nifty50 index can beat the nifty 50 equal weight strategy when the market is being led by a handful of mega-cap stocks.
Nifty50 Value 20 strategy picks stocks with strong underlying businesses available at attractive prices. This makes it a strong pick, especially during market panics.
ETFs for long term portfolios
Smart traders prefer to park their profits in long-term investments. ETFs can be an effective solution for this, ensuring that small regular trading profits gets ploughed back into long-term investments – units of ETFs. Units of ETFs held in demat accounts can be leveraged while trading. The brokers often offer margin capital against these units.
ETFs tracking aforesaid indices can be rewarding for many investors. There is no fund manager risk and the costs are low. Importantly, the investors get exposure to only blue-chip stocks. Investors are relieved from all the tasks associated with stock selection, monitoring and portfolio rebalancing. Investing in an ETF is also tax-efficient as tax liability crystalises only at the time of selling. So, a very long-term investor can keep buying units of ETFs and postpone the tax incidence for many years – possibly until her retirement.
(The author is the founder & CEO of discount stock brokerage platform – SAS Online)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
Given these facts, it is better to earn closer to index returns, than to run the risk of significantly underperforming the index. An index ETF tracking Nifty 50 index makes sense for most investors. Companies entering the Nifty50 index have a proven track record. Many of these have strong balance sheets. Investors can expect them to continue with their good performance. Nifty 50 index is constructed using free float market capitalisation. Hence, relatively large companies by free-float market capitalisation get large weights in the index. Free float market capitalisation is computed by multiplying the number of non-promoter shares by the market price of the share. However, the market price of the share need not be the true worth of the stock. Hence, some investors frown at the methodology. Such investors may prefer other strategies devised using the constituents of Nifty 50 index.
Variants of Nifty 50 index
A simple strategy is to allocate 2% weight to each constituent of the Nifty 50 index. The performance of this strategy is measured by Nifty 50 equal weight Index. Here all constituents of Nifty 50 are given the same weight, and the index is rebalanced twice a year. Though the constituents are the same as the mother index (Nifty 50 index), the weights may differ a lot. For example, as on June 28, 2024, Reliance Industries had a 9.98% weight in Nifty 50 index, but the same stock is given a weight of 2.13% in the Nifty 50 Equal Weight Index.
Another strategy which has worked for many investors is Nifty50 Value 20. This strategy picks 20 attractively valued stocks from the constituents of Nifty50 index. Stocks are selected based on their return on capital employed, price to earnings ratio, price to book ratio and dividend yield. Index is rebalanced annually.
Source: Niftyindices.com, Data as on 28 June 2024.
A look at the above table gives an idea of the risk and returns offered by these three indices.
The Nifty50 equal weight index can be rewarding during a broad-based rally in the stock market. In a bull market, the stocks with relatively low weight in the Nifty 50 index tend to perform better than their bigger counterparts. However, the Nifty50 index can beat the nifty 50 equal weight strategy when the market is being led by a handful of mega-cap stocks.
Nifty50 Value 20 strategy picks stocks with strong underlying businesses available at attractive prices. This makes it a strong pick, especially during market panics.
ETFs for long term portfolios
Smart traders prefer to park their profits in long-term investments. ETFs can be an effective solution for this, ensuring that small regular trading profits gets ploughed back into long-term investments – units of ETFs. Units of ETFs held in demat accounts can be leveraged while trading. The brokers often offer margin capital against these units.
ETFs tracking aforesaid indices can be rewarding for many investors. There is no fund manager risk and the costs are low. Importantly, the investors get exposure to only blue-chip stocks. Investors are relieved from all the tasks associated with stock selection, monitoring and portfolio rebalancing. Investing in an ETF is also tax-efficient as tax liability crystalises only at the time of selling. So, a very long-term investor can keep buying units of ETFs and postpone the tax incidence for many years – possibly until her retirement.
(The author is the founder & CEO of discount stock brokerage platform – SAS Online)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
Source: Stocks-Markets-Economic Times
