By Chintan Haria
Taking the passive route to investing via exchange traded funds (ETFs) has gained considerable traction over the past few years. From having around Rs 90,439 crore assets under management (AUM) as of June 2018, the index ETFs commanded Rs 5.48 lakh crore in AUM as of August 2023, a six-fold rise in just five years, according to data from industry body AMFI.
As entities such as the EPFO, corporates and even retail investors have been investing in large cap ETFs, the surge in their AUM has been phenomenal. ETFs are simple, cost-efficient and liquid products that replicate the indices they track, without fund manager bias.
For direct equity and mutual fund investors, both new and seasoned, large caps stocks or active funds are invariably among the key investments and usually form an important part of the overall portfolio. But stock selection, for direct investors, is challenging with considerable research and analysis of fundamentals required for making good calls, and are highly risky. Taking the active mutual fund route is fine, but selecting the right fund tends to a challenge for retail investors. That is where passive investing helps in the large cap segment and what better way to take exposure than the most followed indices – the Nifty 50 and Nifty 100.
Key large cap indices
When we take the Nifty 50 index, it has the largest of Indian companies in terms of market capitalization. Stocks are weighted in the index based on the free float market capitalization. Therefore, investing in a Nifty 50 ETF provides excellent diversification across stocks and sectors for an investor as it replicates the index in the same weightage. You get a portfolio of 50 stocks across 14 sectors via a single ETF investment.
But if you want a deeper exposure to the large cap space, then the Nifty 100 index can be a suitable avenue for taking exposure via an ETF. This index tracks the combined set of stocks from the Nifty 50 and Nifty Next 50, thus giving a 100-stock universe. These stocks are spread across 28 different sectors, making for a very well-diversified portfolio of all the large cap stocks in the Indian market.
The returns delivered by both these indices have been healthy over the years.
In the graphs below, weightages of various sectors in the Nifty 50 and Nifty 100 are depicted. As can be seen, the Nifty 100 has a bit more diffused exposure to top sectors than the Nifty 50.
The stock weightages are rebalanced every six months based on the free float market capitalization changes.
Taking the ETF route for passive investment
Investors can consider the ETF route for investing in the Nifty 50 and Nifty 100 based on their own asset allocation pattern, risk appetite and time horizon in consultation with an investment advisor. ETFs typically are low-cost products. Since ETFs are traded in the exchanges, you need a demat and a trading account for investing in ETFs. Liquidity is very high for the Nifty 50 ETF and robust even for Nifty 100 ETF as they are traded frequently and with good volumes. So, price discovery is healthy.
The expense ratio ranges from 0.03-0.53% for leading index ETFs, while the tracking error, which is a measure of the deviation of ETF returns from that of the underlying index, must be carefully monitored. Lower the tracking error, better the ETF’s performance.
Thus, you can buy ETF periodically every month or regularly during market dips and hold for the long term. In other words, you can structure your own SIP-like buying frequency.
To conclude, if you are considering to take exposure to large caps in a simple and cost effective manner, the Nifty 50 ETF or Nifty 100 ETF can go a good starting point.
(Chintan Haria, Head Investment Strategy, ICICI Prudential AMC. Views expressed are the author’s own. Please consult your financial advisor before investing.)