Investors relying on the Nifty 50 Equal Weight Index to diversify their portfolio have fared worse than the benchmark so far this year.
The index declined 5.9 percent in 2018 compared with a 1 percent fall in the benchmark NSE Nifty 50. That’s because individual stocks with a higher weight in Nifty 50 have done better. Infosys, with a weight of 5.83 percent, returned 13 percent gains—the highest among the heavyweights.
Nifty Equal Weight Index assigns a uniform 2 percent weight to each of the 50 stocks. So, it hasn’t benefited from the rally in high-weight stocks like Infosys as much as Nifty 50.
The Nifty 50 Equal Weight Index has outperformed the Nifty 50 Index in 11 out of the last 18 calendar years, according to data from the National Stock Exchange of India Ltd.
One of the core principles of investing is to diversify across stocks and sectors and investing in Nifty 50 Equal Weight Index can help achieve this, Anil Ghelani, vice president at DSP Blackrock, said. Currently, this is not possible as HDFC Bank Ltd., the top stock with a weight of 9.9 percent on the Nifty 50, is equivalent to the bottom 15 stocks by weight put together, he said.
Also, the current composition of the Nifty Index is highly skewed towards financials, which have a weight of 36.9 percent, according to BloombergQuint calculations.
So Nifty 50 is likely to continue outperforming the equal weight index “due to our positive view on the heavy weight stocks”, said Ghelani.
Chandan Taparia of Motilal Oswal Securities said HDFC Ltd., with a weight of 7.01 percent, has fallen nearly 5 percent this month. “We could see renewed buying interest which would lead the Nifty higher from current levels.”