Nifty Top 10 Equal Weight index: Is it worth your money?

The Nifty Top 10 Equal Weight Index is designed to track the performance of the top 10 stocks from the Nifty 50. These stocks are selected based on their six-month average free-float market capitalization. Initially, each stock is equally weighted at 10%. However, as stock prices fluctuate, the individual weights will drift until the next rebalancing period.

The index undergoes reconstitution semi-annually in March and September, using data from the previous six months. In addition, it is rebalanced quarterly to reset the weights of the 10 components back to 10% each. This structure aims to maintain an equal representation of the top 10 stocks in the index.

Current Allocation

As of the latest data, the allocation of the 10 stocks in the index has slightly deviated from the original 10% levels due to market movements. This highlights the importance of regular rebalancing to maintain the intended equal weight structure.

Nifty Top 10 vs. Nifty 50

The Nifty Top 10 Index is a highly concentrated , similar in concept to the US-based FANG+ Equal-Weighted Index, which includes popular tech stocks like Facebook (Meta), Amazon, Apple, Netflix, Google (Alphabet), Tesla, Microsoft, Nvidia, Snowflake, and Broadcom.

While the Nifty 50 index includes 50 stocks, the Nifty Top 10 Index comprises only the top 10 stocks from the Nifty 50, accounting for 45.3% of the Nifty 50's total weight. The remaining 40 stocks in the Nifty 50, which hold the remaining 55% weight, do not impact the Nifty Top 10 Index's performance but do affect the Nifty 50.

According to NSE, the correlation between the Nifty Top 10 and Nifty 50 indices stands at an extremely high 0.97 over a five-year period. This means the returns of the Nifty Top 10 are expected to be similar to those of the Nifty 50, with deviations occurring based on how the remaining 40 stocks in the Nifty 50 perform.

Investment Considerations

Currently, no asset management companies (AMCs) have announced funds based on the Nifty Top 10 Equal Weight Index. However, it is likely that index funds or ETFs based on this index will be launched in the near future. When they do, investors should carefully consider whether a concentrated large-cap index meets their investment needs.

For large-cap exposure, many investors prefer the broader diversification offered by the Nifty 50 index. Some may also consider adding the Nifty Next 50 for additional exposure, or opt for Nifty 100 index funds, which combine Nifty 50 and Nifty Next 50. While passive investing is popular for its simplicity and lower costs, a mix of active and passive funds can help build a more robust and diversified portfolio.

Conclusion

The Nifty Top 10 Equal Weight Index is likely to serve as a benchmark for asset managers and a reference index for passive funds. However, for most retail investors, existing options like the Nifty 50, Nifty Next 50, or a combination of active and passive funds may provide better diversification and risk management.

In summary, while the Nifty Top 10 Equal Weight Index offers an interesting approach to large-cap investing, its concentrated nature may not be suitable for all investors. Those seeking broad market exposure and diversification may find better options with existing indices and a mix of investment strategies.

(The author Chakravarthy V. is Co-founder & Executive Director, Prime Wealth Finserv. Views expressed are own)

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)