Should first-time investors go for a 500-stock mutual fund scheme?
Financial Services has the highest weightage in the index at 27.60 percent.
For first-time investors, who are new to the vagaries of the stock market, financial advisors often recommend diversified equity mutual funds as an instrument of investment.
This strategy can act as a rite of passage for young investors who may not have been exposed to instruments other than traditional avenues such as fixed deposits or small saving schemes.
A diversified investment strategy across market capitalisations can ensure balance between risk and return over a long term for a first-time investors’ portfolio.
But can buying a mutual fund scheme, which holds 500 stocks, add value for first-time investors?
Also read | Computerji, lock kiya jaaye: Midcaps that quant-based mutual fund algos select
India’s largest asset management company, SBI Mutual Fund, has launched a SBI Nifty 500 Index Fund, which includes the top 500 stocks by market capitalisations that cover the large-cap, mid-cap and small-cap segments.
To be sure, Motilal Oswal Nifty 500 Index Fund was the first scheme based on this theme and was launched five years ago. Axis Nifty 500 Index Fund was launched two months back.
What’s on offer?
Story continues below Advertisement
The Nifty 500 Index covers around 92 per cent of India’s listed universe and includes all 21 sectors across large-cap, mid-cap and small-cap companies.
Financial Services has the highest weightage in the index at 27.60 per cent. It is followed by IT (information technology) (9.90 per cent), oil, gas and consumable fuels (8.75 per cent), automobile and auto components (7.46 per cent) and FMCG (fast moving consumer goods) (7.24 per cent).
Top constituents by stock weightage are HDFC Bank (6.41 per cent), Reliance Industries (5.31 per cent), ICICI Bank (4.5 per cent), Infosys (3.65 per cent) and ITC (2.41 per cent).
The track record of Motilal Oswal Nifty 500 Index Fund showed that the scheme has delivered 35.29 per cent, 16.73 per cent and 21.84 per cent returns on one-year, three-year and five-year basis, respectively. The fund’s performance is better than returns of Nifty 100 Total return Index (TRI) and Nifty 50 TRI. The scheme has 74.5 per cent allocation to large-cap stocks, 16.6 per cent in mid-cap stocks and 8.9 per cent in small-cap stocks.
What works?
Since Nifty 500 Index Fund includes companies from various sectors such as financial services, consumer goods, healthcare, and technology, it reduces the risk associated with any single industry or company.
Also read | Retirement planning in your 40s: Why this is the right time and here’s what you need to do
By investing across different market capitalisations and sectors, the Nifty 500 reduces the impact of volatility in individual stocks or sectors.
What doesn’t work?
The Nifty 500 is market-capitalisation-weighted, where larger companies dominate the index. The lopsided weightage can dilute the influence of mid-cap and small-cap stocks and also reduce the diversification that is expected from a 500-stock index.
The Nifty 500 is often concentrated in specific sectors such as financial services, IT, and energy. If these sectors face downturns, the overall performance of the index can be significantly affected.
Should first-time investors go for it?
According to experts, it’s a good idea for new uninitiated investors to take a plunge with a broad-based index fund as drawdowns in such schemes may not be that sharp.
“Even during sharp market corrections, there are certain sectors and stocks that stand out and give positive returns. A broad-based index like Nifty 500 may offer that comfort,” said Deepak Chhabria, CEO of Axiom Financial Services.
However, the passive funds are more popular among ultra high net worth investors (HNIs) and family offices.
Ravi Kumar TV, the founder of Gaining Ground Investment Services, believes that an active multi-cap fund maybe better suited for first-time investors.
“We think that the broader market will move higher because of stable economic conditions.However, the key is which businesses will do well and how will their stock prices perform. Screening and researching should be left to a fund manager. A multi-cap fund will be better to start with for a new investor through the SIP [systemic investment plan] route,” Kumar said.
Also read | Should retirees invest in tax-free bonds in secondary markets?
While the Nifty 500 offers broad exposure and diversification, it has limitations such as over-reliance on large-cap stocks, sectoral concentration, and vulnerability to market conditions.
Choosing between passive and active funds depends on several factors, including investment goals, risk tolerance, market outlook, and preference for fees.