Will Nifty 50 Heavyweights Lose Steam In The Next Rally?

After Prime Minister Narendra Modi returned to power with a bigger majority, the Nifty 50 rose and hit an all-time high on June 3. But the benchmark has since fallen more than 8 percent amid domestic tax and global trade war worries.

Still, six of the top 10 shares by weight outperformed the gauge. That’s because investors chased them in the past year on the back of optimism on earnings and return ratios.

Domestic mutual funds, which on an average received about Rs 8,000 crore every month in the past year through systematic investment plans, piled money into the index heavyweights. Their exposure to the 10 weighted stocks rose by an average 15 percent, while it fell 13 percent for the bottom 30 weighted stocks in the 12 months through June.

This rush for select heavyweights led to an even more lopsided Nifty 50. The top 10 stocks have a combined weight of 60.73 percent on the index—the levels seen only four times since 2005.

And every time after peak polarisation, the recovery or rally was led by the bottom 30 weighted stocks—as seen in 2005, 2007, 2009 and 2013.

Barring a few of the top large caps, the other stocks on the index have corrected quite sharply along with the broader markets and now have started to offer , Taher Badshah, chief investment officer, equities at Invesco Mutual Fund, told BloombergQuint in a recent interview. “The risk-averse trade is slightly overdone and Invesco Mutual Fund expects to see a mean reversion.”