A passive-strategy fund that tracks Equal Nifty 50

DSP Blackrock Investment Managers Pvt. Ltd has launched its first passive fund—DSP BlackRock Equal Nifty 50 Fund. This is an equity fund that relies on automatic allocation in stocks that constitute the Nifty 50 basket. 

As mentioned above the fund will follow a passive strategy, which requires no intervention from fund managers when it comes to deciding which stocks to buy and in what proportion. The fund portfolio will comprise all the stocks that are there in the Nifty 50 index.

Additionally, the mandate is to have equal weight in all stocks, which means each of the stocks in the Nifty 50 index will be held in a proportion of 2% in this fund. The benchmark for the fund is Nifty 50 Equal Weight Index.

Choosing the Nifty 50 Equal Weight Index eliminates the bias due to large free float market capitalisation of stocks. As stock prices rise, profits will get booked to maintain this allocation in the fund. 

Anil Ghelani, senior vice president, DSP BlackRock Investment Managers Pvt. Ltd said, “Globally, smart beta format of passive equity investing is on the rise. We wanted to start with a simple form of smart beta and felt an equal weight Nifty 50 portfolio will bring the adequate sector and stock diversification for investors. Back testing of performance data from June 1999 till July 2017 shows the conventional Nifty 50 index delivered 14% annualised returns in the period whereas the equal weight index delivered 17% annualised returns.” Even when calendar year returns were considered, in 11 out of 17 calendar years, the equal weight index outperformed the regular Nifty 50 index, he added. 

This is a strategy that can be used both for long term buy-and-hold investors as well as those who want to apportion a part of their portfolio to balance out an existing equity allocation. 

The passive nature of the fund means that regardless of the market condition, there is no bias in which sectors get included or left out. The fund portfolio will follow the composition of its underlying index. Moreover, the cost in a passive fund is lower than that of an actively managed fund. 

Back testing of returns for this quantitative strategy shows that in times of sharp market movement, a sharp fall or rise, or when the market is at an inflection point, this strategy does better than its free-float market capitalisation weighted Nifty 50 portfolio. 

For investors who have a long-term investment objective focussed on asset allocation, this is an appropriate equity fund. It can help balance risk in a portfolio which already consists of some actively managed equity funds. 

In range-bound markets and when there is a rally led by specific themes, this strategy has shown underperformance against the regular free-float market-cap weighted index.

In emerging markets like India, active fund managers have successfully delivered excess returns over the benchmark and performed better than passive strategies. While that requires careful selection of fund managers who can consistently outperform their benchmarks, it does result in higher returns for the portfolio. 

As domestic markets become more efficient, there is a possibility that in the large-cap space, the ability to generate excess returns against the benchmark will shrink. Moreover, the percentage of fund managers with long-term consistency in outperforming their benchmark across different market periods is very low.

With an expense of 40 basis points for the direct plan and 90 basis points for the regular plan, this is not the cheapest index fund around. But if you wish to avoid the fund manager risk, which comes with actively managed mutual funds, opt for a passive fund.This scheme is one of the passive strategies that you can consider.