My analysis of Nifty Top 10 Equal Weight Index

• 18 August 2024
• nifty,
• nifty top 10 index,
• index,
• opinion,
• index investing

All figures sourced from NSE Indices factsheets as of August 2024.

What is this Index about? #

NSE Indices has developed the Nifty Top 10 Equal Weight Index which aims to track the performance of the top 10 stocks selected based on 6-month average free-float market capitalization from the Nifty 50.

Unlike a traditional market-cap weighted index where larger companies hold a proportionally larger share, an equal weight index assigns the same percentage allocation to each constituent — roughly 10% per stock here, rebalanced periodically. This means a single bad quarter from any one stock has the same impact on the index as it would from any other.

Nifty Top 10 Equal Weight Index can be used for a variety of purposes such as benchmarking fund portfolios, launching of index funds, ETFs and structured products.

My opinion on this Index #

This is a super concentrated index comprising of the 10 largest large cap stocks. It's always advised to have a diversified portfolio to mitigate concentration risk, and not be overconcentrated in a single company or sector.

This index, unfortunately, is at risk from all of these facets. Since it has only 10 stocks, any adverse situation impacting these companies — such as banking sector regulation changes, RBI rate decisions, or technology policy shifts affecting the IT-heavy constituents — could cause this Index to fall sharply. The downside protection is not great here, in my opinion.

Decoding the data points #

Total returns #

This Index is stated to have a 1 year return at 20.32, 5 year return at 16.61 and since-inception (approximately 18 years) return at 14.65. Compare this to Nifty 50 where the 1 year return is at 27.84, 5 year return at 18.92 and 15 year return at 11.8.

*Note: The since-inception period is approximately 18 years for Nifty Top 10 Equal Weight but only 15 years for the Nifty 50 comparison figure. These are not identical durations and should not be read as a like-for-like comparison.

Compared to Nifty 50 Equal Weight the returns are lower across all time horizons. Nifty 50 also provides better returns compared to Nifty Top 10 Equal Weight, except for the since-inception figure (where the duration mismatch applies). Will need to revisit this observation after crunching the rolling returns on equal durations.

Standard Deviation #

Standard deviation measures how much annual returns tend to vary around the long-term average. A higher standard deviation means returns have been more spread out — some years much better, some years much worse than the average. For example, if an index has an average return of 10% and a standard deviation of 4%, roughly two-thirds of annual returns historically fell between 6% and 14%. A high standard deviation is generally less desirable for risk-averse investors.

Over the long term, all three indices have nearly identical standard deviations. Nifty Top 10 Equal Weight has a lower 1-year standard deviation than Nifty 50 but higher over 5 years. Nifty 50 Equal Weight is consistently the lowest of the three. No clear advantage exists for Nifty Top 10 Equal Weight on this metric.

Beta #

Looking at the Beta values, it's clear that Nifty 50 Equal Weight is less volatile compared to Nifty 50. However for Nifty Top 10 Equal Weight this can vary between lower to more than Nifty 50 volatility — a direct consequence of its concentrated portfolio. Investors looking for a less volatile alternative to Nifty 50 should consider Nifty 50 Equal Weight. Nifty Top 10 Equal Weight provides no consistent benefit in this regard.

Correlation factor #

Both Nifty Top 10 Equal Weight and Nifty 50 Equal Weight show very high correlation to Nifty 50 (above 0.93 across all periods), with negligible difference between them. Investors cannot use correlation to Nifty 50 as a differentiator between these two indices — Nifty Top 10 Equal Weight offers no diversification benefit on this measure.

Dividend Yield #

Nifty Top 10 Equal Weight is the clear winner here. Given the concentrated portfolio of top dividend-paying stocks, this is expected. For investors interested in dividend yield, Nifty Top 10 Equal Weight can be preferred.

Summary #

• Nifty Top 10 Equal Weight fails to provide better returns than Nifty 50 or Nifty 50 Equal Weight across most comparable time horizons. Rolling return analysis is needed for a more complete picture.

• Nifty Top 10 Equal Weight is slightly lower to more volatile than Nifty 50 depending on the period. Nifty 50 Equal Weight is consistently the least volatile of the three. No clear advantage in favour of Nifty Top 10 Equal Weight.

• Nifty Top 10 Equal Weight has a higher dividend yield compared to Nifty 50 and Nifty 50 Equal Weight — its only clear edge.

• Correlation to Nifty 50 is virtually identical for both Nifty Top 10 Equal Weight and Nifty 50 Equal Weight. No differentiation advantage here.

• Given the above, most investors should prefer Nifty 50 or Nifty 50 Equal Weight over this new Nifty Top 10 Equal Weight index. With only 10 stocks, the index is structurally overconcentrated — likely dominated by BFSI and IT sectors — and provides neither better risk-adjusted returns nor meaningfully lower volatility compared to Nifty 50 or Nifty 50 Equal Weight.

Related Links #

• Factsheet
• DSP Nifty Top 10 Equal Weight Index Fund

Disclaimer #

This post is not investment advice. I am sharing my opinion based on factual data sourced from NSE Indices. Please do your own analysis before making any investment decisions.

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