NSE launches the Nifty Top 10 Equal Weight Index. Should you invest?
This article discusses the Nifty Top 10 Equal Weight Index covering the 10 largest mega-cap stocks in India and whether these stocks are suitable for investors.
NSE launches the Nifty Top 10 Equal Weight Index. Should you invest?
Posted on 26 Jun 2024 • Updated on: 10 Jul 2024
Author: Sayan Sircar
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This article discusses the Nifty Top 10 Equal Weight Index covering the 10 largest mega-cap stocks in India and whether these stocks are suitable for investors.
This article is a part of our detailed article series on specific indices in India. Ensure you have read the other parts here:
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NSE launches the Nifty EV & New Age Automotive Index. Should you invest?
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The NIFTY Defence Index has risen more than 6x in 6 years. Should you invest?
This article discusses the blistering performance of the Nifty Defence index and how much defence stocks have beaten the broad market since its launch.
📚 Topics covered:
- What is the Nifty Top 10 Equal Weight Index?
- Why did NSE launch the Nifty Top 10 Equal Weight Index?
- Which stocks are in the Nifty Top 10 Equal Weight Index?
- How has the Nifty Top 10 Equal Weight Index behaved in the past?
- How has the Nifty Top 10 Equal Weight Index performed in terms of rolling returns and risk?
- Is it a good time to invest in the Nifty Top 10 Equal Weight Index?
- How to invest in the Nifty Top 10 Equal Weight Index?
- Is there a Nifty Top 10 Equal Weight Index fund in India?
What is the Nifty Top 10 Equal Weight Index?
The Nifty Top 10 Equal Weight Index is an index (like the SENSEX or Nifty 50) tracking the top 10 largest stocks in India.
As per the NSE website:
The index aims to track the performance of the top 10 stocks selected based on 6-month average free-float market capitalization from the Nifty 50.
The index aims to track the performance of the top 10 stocks selected based on 6-month average free-float market capitalization from the Nifty 50.
This is India’s first mega-cap (largest of large-cap stocks) stock index, and unlike the usual free-float market capitalization-weighted indices, this index invests equally in all ten stocks.
As per the index factsheet, the index details are as follows:
| Metric | Description |
|---|---|
| Methodology | Equal-Weighted |
| No. of Constituents | 10 |
| Launch Date | Jun 24, 2024 |
| Base Date | March 02, 2006 |
| Base Value | 1000 |
| Calculation Frequency | End of day |
| Index Rebalancing | Semi-Annually |
Why did NSE launch the Nifty Top 10 Equal Weight Index?
| Year | NSE Indices |
|---|---|
| 2013 | 36 |
| 2014 | 38 |
| 2015 | 48 |
| 2016 | 57 |
| 2017 | 69 |
| 2018 | 76 |
| 2019 | 78 |
| 2020 | 77 |
| 2021 | 87 |
| 2022 | 94 |
| 2023 | 104 |
| 2024 | 107 |
NSE makes money by creating indices and licensing that data to AMCs to launch index funds, ETFs, and other mutual funds tracking the index. It is such a great business that the number of indices published by NSE has increased three times from Jan-2013 to Jan-2024.
As per the index factsheet, these are the stocks in the index:
Nifty Top 10 Equal Weight Index aims to track the performance of the top 10 stocks, selected based on free-float market capitalization from the Nifty 50 Index.
We did not have such a concentrated mega-cap index in the past. Now that we have it, it will be interesting to see what kind of use cases AMCs and investors can think of for this index.
Which stocks are in the Nifty Top 10 Equal Weight Index?
The index has these stocks:
| Company Name | Industry | Symbol |
|---|---|---|
| Axis Bank Ltd. | Financial Services | AXISBANK |
| HDFC Bank Ltd. | Financial Services | HDFCBANK |
| Hindustan Unilever Ltd. | Fast Moving Consumer Goods | HINDUNILVR |
| ICICI Bank Ltd. | Financial Services | ICICIBANK |
| Infosys Ltd. | Information Technology | INFY |
| ITC Ltd. | Fast Moving Consumer Goods | ITC |
| Kotak Mahindra Bank Ltd. | Financial Services | KOTAKBANK |
| Larsen & Toubro Ltd. | Construction | LT |
| Reliance Industries Ltd. | Oil, Gas & Consumable Fuels | RELIANCE |
| Tata Consultancy Services Ltd. | Information Technology | TCS |
The updated list is here: stocks.
The target weight of these 10 stocks is 10%, as this is an equal weight index. Investors should note the concentrated sector allocation: Banking 40%, FMCG 20%, IT 20%, and Construction and Energy 10% each.
How has the Nifty Top 10 Equal Weight Index behaved in the past?
The Nifty Top 10 Equal Weight Index was started with a base date of March 02, 2006 and a starting value of 1000. The performance chart below shows how this index has performed versus the broad market index Nifty 50, the Nifty 50 Equal Weight (same stocks as the Nifty 50 but equal-weighted), and the SENSEX indices (total return = price changes plus reinvested dividends):
How has the Nifty Top 10 Equal Weight Index performed in terms of rolling returns and risk?
These rolling charts work on a window basis. Each point on the chart is calculated using a 3-year SIP like this:
- Point 1: 1st Jan 2020 to 1st Jan 2023
- Point 2: 1st Feb 2020 to 1st Feb 2023
- and so on
Investors should note the outperformance of the Nifty Top 10 Equal Weight Index vs. the Nifty 50 and SENSEX around Feb 2019. This is called a concentration rally where the largest stocks give the highest returns. Predictably, the Nifty 50 Equal Weight index returns have suffered in this period.
Here, using the same rolling window concept, we have calculated the standard deviation of the monthly returns using 36 months:
The cap-weighted indices have shown consistently lower risk compared to the equal weight indices. This is expected since in the equal weight index, even the smallest stocks, which are more volatile than the largest ones, contribute equally to the daily index movement.
The risk-adjusted returns chart shows that these indices have unpredictably moved around each other: higher risk coming with higher return and vice versa:
An interesting observation from the rolling correlation (which measures how much the indices are similar to each other) chart:
A not-unexpected result of looking at equal-weighted indices vs. size-weighted (or cap-weighted) indices is seen in the correlation chart above. If the stock market goes up mainly due to the largest stocks doing well, then the equal weight indices and the cap-weighted correlations break down as seen around Feb 2019.
To understand how to use data to understand if this index is good or not:
Is it a good time to invest in the Nifty Top 10 Equal Weight Index?
The rolling return charts offer an interesting insight for this index vs. the closest peers:
- SENSEX and Nifty 50: Top 30 and Top 50 largest stocks and allocated as per free-float market capitalization i.e. size
- Nifty 50 Equal Weight: Same 50 stocks as the Nifty 50 but equally allocated.
We will show two charts for excess returns of Nifty Top 10 Equal Weight Index over the others for both SIP and lump sum.
These indices give an indication of the timing of this index launch by the NSE. The top 10 stocks, weighted equally, are underperforming broader indices as of this moment (vs. the opposite trend before July 2021).
How to invest in the Nifty Top 10 Equal Weight Index?
You cannot directly invest in an index. You either need:
- A mutual fund or ETF that tracks the index
- A mutual fund that buys an ETF that tracks the index (called a fund-of-fund)
If you do not have an index fund or do not wish to invest in an ETF, the next best alternative is to invest directly in the underlying stocks. The current list of stocks is available on this page under “Index Constituent” in the Downloads section.
Is there a Nifty Top 10 Equal Weight Index fund in India?
ON 9-Jul-2024, DSP AMC has filed draft applications with SEBI for an ETF and Index fund tracking the Nifty Top 10 Equal Weight Index:
- ETF: https://www.sebi.gov.in/filings/mutual-funds/jul-2024/dsp-nifty-top-10-equal-weight-etf_84679.html
- Index fund: https://www.sebi.gov.in/filings/mutual-funds/jul-2024/dsp-nifty-top-10-equal-weight-index-fund_84677.html
While these funds get approved, for the time being, investors can buy the underlying stocks and rebalance the portfolio as per the index factsheet. This should be fairly straightforward to execute, barring the capital gains tax hit, since there are only ten stocks.
A word of caution: A Top 10 equal weighted index is not diversified. There are too few stocks and the allocation to some sectors is massively lopsided.
E.g., there are currently four banks in the index (Axis, HDFC, ICICI, and Kotak), leading to a 40% allocation to the banking sector. Such concentration, if not understood and risk-managed, may destroy wealth.
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This post titled NSE launches the Nifty Top 10 Equal Weight Index. Should you invest? first appeared on 26 Jun 2024 at https://arthgyaan.com
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