The case against Nifty 500

Summary: This story breaks down why the Nifty 500, despite its broad-market label, ends up being heavily influenced by large caps, and why that matters for investors seeking true all-cap exposure.

Many investors love the idea of owning the whole market in a single stroke. The Nifty 500 seems perfect for that. You start an SIP in this index, and you get instant exposure to large caps, mid caps and small caps. On paper, it feels like the easiest way to diversify across the entire Indian equity landscape.

But once you look a little deeper, the Nifty 500 starts to feel more like a slightly stretched large-cap fund. The promise of broad-market participation is there, but the actual behaviour of the index tells a different story.

Broad in name, large-cap in behaviour

Although the Nifty 500 holds companies across segments, its behaviour is overwhelmingly dictated by large caps. Over the last three years, the Nifty 500 has averaged a significant 73 per cent allocation to large caps. Mid and small caps are present, but their combined influence is too small to shape the index meaningfully.

While this imbalance is not a problem by itself, it can be if investors intend to benefit from the different characteristics of mid and small caps. If that’s the goal, the Nifty 500’s tiny allocations to them are simply not enough to make a difference.

And this becomes very obvious when you compare it against portfolios where the large–mid–small split is set deliberately.

To understand the difference, we ran a long-term SIP comparison. One version put all contributions into the Nifty 500. The others split the same SIP across the Nifty 100, Nifty Midcap 150 and Nifty Smallcap 250 using common allocation patterns. In the first table — placed just below this paragraph — these allocation styles appear as ratios of large: mid: small, making it clear which segment dominates each mix.

You don’t need to read the exact figures to see the outcome. The pattern is unmistakable. Every deliberate large–mid–small mix ended ahead of the Nifty 500 over the 15-year SIP period. The moment the mid- and small-cap segments were given meaningful weights, the portfolio’s long-term trajectory improved.

This isn’t about superior timing or clever strategy. It’s simply the difference between letting the market decide your allocation versus choosing it yourself.

How much more do you fall when markets turn?

The natural pushback to any mid- or small-cap tilt is volatility. These segments do swing more, so shouldn’t customised mixes behave far worse in downturns?

To check this, we compared all major corrections since 2010 — periods where the Nifty 500 fell 15 per cent or more — and tracked how the same DIY mixes behaved. The details sit in the second table, placed below, which reports the corpus declines for each portfolio during those correction windows.

While the customised mixes did fall a bit more, the gap was surprisingly small. The additional drawdown was modest relative to the long-term benefit that these mixes delivered in the first table.

That is the structural weakness of the Nifty 500 index, one that most investors never see unless they compare it this way.

Our take

Both tables point to the fact that the Nifty 500 is not the efficient all-cap solution it appears to be. Its large-cap-heavy structure means mid and small caps don’t contribute enough to shape long-term returns, yet they still show up during declines. That leaves the index stuck in an unhelpful middle zone, exposed enough to feel volatile, but not exposed enough to benefit from the segments driving that volatility.

So, if your priority is true multi-segment participation, then assigning the large:mid:small mix deliberately, using simple ratios like those seen in the first table, works far better.

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This article was originally published on November 17, 2025.