Your Questions Answered: I want to invest in equity mutual funds. Please elaborate on Nifty Top 10 Equal Weight Index | Mint

Q. My wife and I have been investing in debt mutual funds for the past 8 years. We now intend to diversify and invest in equity mutual funds. We received suggestions to invest in Nifty Top 10 Equal Weight Index, however, we have limited knowledge about the same. Can you please elaborate on the same? Additionally, please explain the differences between the Nifty 50 Index and Nifty Top 10 Equal Weight Index.

Deepinder Kapoor, Greater Kailash, New Delhi

Introduction

Investing in mutual funds has become a popular choice for individuals seeking to grow their wealth while diversifying their portfolios. Among the myriad of options available, mutual funds tracking the Nifty Top 10 Equal Weight Index have garnered attention for their unique approach to equity investment. Let’s delve into what makes these funds stand out and why they might be worth considering.

The index is a benchmark that represents the performance of the top 10 companies listed on the Nifty 50, based on their six-month average free-float market capitalisation. Unlike traditional indices that are weighted by market capitalisation, this index assigns an equal weight to each of the 10 constituents. This approach ensures that no single stock dominates the index, promoting balanced exposure across all selected companies.

How do mutual funds tracking Nifty Top 10 Equal Weight Index operate?

There are several factors that differentiate the Nifty Top 10 Equal Weight Index from other mutual funds. Below, we have listed how these funds operate:

• Equal weighting strategy: These funds replicate the index by investing in the same 10 stocks with equal allocation. This strategy reduces over-reliance on a single stock and mitigates the risk associated with market capitalisation-weighted indices.
• Passive investment approach: These funds follow a passive investment strategy, aiming to mirror the performance of the underlying index. This approach typically results in lower management fees compared to actively managed funds.
• Diversification: By investing in the top 10 companies across various sectors, these funds offer diversification within a concentrated portfolio.
• Rebalancing: To maintain equal weighting, the portfolio is periodically rebalanced, ensuring alignment with the index’s methodology.

Nifty Top 10 Equal Weight Index eligibility criteria

The Nifty Top 10 Equal Weight Index is a unique benchmark designed to track the performance of the top 10 companies listed on the Nifty 50. Its equal-weighting methodology ensures balanced exposure across all selected stocks, making it an attractive option for investors seeking diversification. Below, we have listed the eligibility criteria that govern the inclusion of stocks in this index.

• Inclusion in the Nifty50: Only stocks that are part of the Nifty 50 index at the time of review are eligible for inclusion in the Nifty Top 10 Equal Weight Index.
• Top 10 companies by market capitalisation: The index selects the top 10 companies based on their six-month average free-float market capitalisation. This ensures that the most prominent and liquid stocks are represented.
• Sectoral representation: The index includes stocks from diverse sectors such as financial services, fast-moving consumer goods, information technology, construction, and oil, gas, and consumable fuels. This sectoral diversity enhances the index’s appeal to investors seeking a well-rounded portfolio.
• Equal weighting: Each stock in the index is assigned an equal weight, ensuring that no single stock dominates the index. This approach promotes balanced exposure and reduces concentration risk.
• Periodic review and rebalancing: The index undergoes a semiannual review to ensure that it continues to represent the top 10 companies accurately. Additionally, the portfolio is rebalanced quarterly to maintain equal weighting

Benefits of investing in the Nifty Top 10 Equal Weight Index

Investing in the stock market can be a daunting task, especially with the plethora of indices and funds available. Among these, the Nifty Top 10 Equal Weight Index stands out as a unique and compelling option for investors. This index, which assigns equal weight to the top 10 companies from the Nifty 50, offers a balanced and diversified approach to equity investment. Let’s explore the key benefits of investing in this index.

• Balanced exposure: Unlike traditional market-cap-weighted indices, the Nifty Top 10 Equal Weight Index ensures that each of its 10 constituent stocks has an equal influence on the index’s performance. This balanced exposure reduces the risk of over-reliance on a single stock or sector, promoting stability in the portfolio.
• Diversification: The index includes top-performing companies from various sectors, such as financial services, technology, consumer goods, and energy. This sectoral diversity helps mitigate risks associated with sector-specific downturns and provides a well-rounded investment option.
• Cost effectiveness: Investing in funds that track this index typically involves lower expense ratios due to their passive management strategy. This cost-effectiveness enhances the overall returns for investors.
• Transparency and simplicity: The rule-based selection and equal-weighting approach of the index ensures transparency and simplicity. Investors can easily understand the composition and methodology of the index, making it a straightforward investment choice.
• Periodic rebalancing: To maintain equal weighting, the index undergoes periodic rebalancing. This ensures that the portfolio remains aligned with the index’s methodology and continues to reflect the performance of the top 10 companies.
• Tax efficiency: Funds tracking the Nifty Top 10 Equal Weight Index often offer tax-efficient investment options. This is particularly beneficial for long-term investors looking to optimize their post-tax returns.

Risk associated with investing in the Nifty Top 10 Equal Weight Index

Investing in mutual funds that track the Nifty Top 10 Equal Weight Index can be an appealing option for those seeking a balanced and diversified equity portfolio. However, like any investment, these funds come with their own set of risks. Being aware of these risks is crucial for making informed decisions. Let’s explore the key risks associated with investing in these mutual funds.

• Market risk: Mutual funds tracking the Nifty Top 10 Equal Weight Index are equity-focused, meaning their performance is directly tied to the stock market. Fluctuations in market conditions, economic factors, and geopolitical events can impact the value of the underlying stocks, leading to potential losses.
• Tracking error: While these funds aim to replicate the performance of the Nifty Top 10 Equal Weight Index, there may be slight deviations due to factors such as transaction costs, cash holdings, and timing differences in portfolio rebalancing. This tracking error can result in returns that differ from the index.
• Sectoral risks: Although the index offers diversification across sectors, certain sectors may underperform due to industry-specific challenges. For example, a downturn in the technology or financial sector could negatively impact the overall performance of the fund.
• Volatility: While the equal-weighting methodology reduces concentration risk, it does not eliminate market volatility. Investors may experience fluctuations in the value of their investments, especially during periods of market instability.
• Liquidity risk: In certain market conditions, the liquidity of the underlying stocks may be affected, making it challenging for the fund to execute trades efficiently. This can impact the fund’s ability to maintain its equal-weighting strategy.
• Economic and political risks: Changes in economic policies, interest rates, inflation, and political developments can influence the performance of the index and the mutual funds tracking it.
• No guaranteed returns: As with any equity investment, there is no guarantee of returns. The performance of the fund depends on the performance of the underlying stocks, which can be unpredictable.

Difference between Nifty 50 and Nifty Top 10 Equal Weight Index

The Nifty 50 and the Nifty Top 10 Equal Weight Index are two prominent benchmarks in the Indian stock market, each with distinct methodologies and investment philosophies. While both indices aim to represent the performance of leading companies, their approaches differ significantly. Let’s explore these differences in detail.

Composition

• Nifty 50: This index comprises the top 50 companies listed on the National Stock Exchange (NSE) based on their free-float market capitalisation. It represents a broad spectrum of sectors and industries, providing a comprehensive view of the Indian economy.
• Nifty Top 10 Equal Weight Index: This index selects the top 10 companies from the Nifty 50 based on their six-month average free-float market capitalisation. It focuses on a smaller, more concentrated portfolio.

Weighting methodology

• Nifty 50: The index is market capitalisation weighted, meaning larger companies have a higher influence on the index’s performance. For example, companies like Reliance Industries and HDFC Bank often dominate the index due to their substantial market capitalisation.
• Nifty Top 10 Equal Weight Index: Each stock in this index is assigned an equal weight, ensuring balanced exposure across all 10 constituents. This methodology reduces concentration risk and promotes diversification within the selected stocks.

Sectoral representation

• Nifty 50: With 50 stocks, the index offers broad sectoral representation, including financial services, technology, consumer goods, energy, and more.
• Nifty Top 10 Equal Weight Index: While it includes stocks from diverse sectors, its smaller composition may result in limited sectoral representation compared to the Nifty 50.

Risk and volatility

• Nifty 50: The market capitalisation weighting can lead to higher volatility, especially if a few large-cap stocks experience significant price movements.
• Nifty Top 10 Equal Weight Index: The equal-weighting methodology contributes to lower volatility and reduced reliance on any single stock, making it a relatively stable investment option.

Performance

• Nifty 50: The performance of this index is heavily influenced by the larger companies, which can be both an advantage and a drawback depending on market conditions.
• Nifty Top 10 Equal Weight Index: Historical data suggests that equal-weighted indices often outperform market capitalisation-weighted indices over the long term due to their balanced approach.

Investment philosophy

• Nifty 50: Ideal for investors seeking exposure to a broad range of sectors and companies, reflecting the overall market performance.
• Nifty Top 10 Equal Weight Index: Suitable for investors looking for a concentrated portfolio with balanced exposure to top-performing companies.

Both the Nifty 50 and the Nifty Top 10 Equal Weight Index offer unique investment opportunities, catering to different investor preferences and goals. While the Nifty 50 provides a comprehensive view of the Indian economy, the Nifty Top 10 Equal Weight Index offers a focused and balanced approach to equity investment. Understanding these differences can help investors make informed decisions based on their financial objectives and risk tolerance.

Nifty Top 10 Equal Weight Index constituents

As mentioned above, the Nifty Top 10 Equal Weight Index is a unique benchmark that assigns equal weight to the top 10 companies from the Nifty 50 based on their six-month average free-float market capitalisation. Below, we have listed the current constituents of this index and their significance as of March 28, 2025.

Data as of March 28, 2025; sourced from NSE

How are they taxed?

Mutual funds tracking the Nifty Top 10 Equal Weight Index are categorized as equity mutual funds because they primarily invest in stocks. The taxation rules for equity mutual funds are as follows:

• Short-Term Capital Gains (STCG): If the units of the mutual fund are sold within 12 months of purchase, the gains are considered short-term capital gains. STCG is taxed at a flat rate of 20%, irrespective of the investor’s income tax slab.
• Long-Term Capital Gains (LTCG): If the units are sold after 12 months of purchase, the gains are considered long-term capital gains. LTCG is taxed at 12.5% on gains exceeding INR 1.25 lakh in a financial year. Gains up to INR 1.25 lakh are exempt from tax.

 Nifty Top 10 Equal Weight Index returns

Data as of March 28, 2025; sourced from NSE

Conclusion

The Nifty Top 10 Equal Weight Index offers a unique blend of balance, diversification, and potential for superior returns. Its equal-weighting methodology, coupled with exposure to India’s leading companies, makes it an appealing choice for investors seeking a stable and transparent investment option. However, as with any investment, it’s essential to assess your financial goals and risk tolerance. 

Disclaimer: Investing in mutual funds involves risks, including potential loss of principal. Please consult with a financial advisor before making any investment decisions.

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