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NFO review: DSP Nifty 50 Equal Weight ETF

This ETF variant of the AMC's earlier launched equal weighted Nifty index fund will invest in Nifty 50 stocks but with equal weightage

NFO review: DSP Nifty 50 Equal Weight ETF

DSP Mutual Fund has rolled out a new fund offer (NFO) on October 18, 2021, in the smart beta-index-fund space. It will close for subscription on October 29, after which it can be purchased and sold on the stock exchanges.

Smart beta is a fusion of active and passive investing strategies wherein an index is altered by deleting or knocking off something based on one or more fundamental, technical or other filters. Globally, smart-beta products have been around for a fairly long time but they have recently started to catch Indian investors' attention. This mode of investing is also known as 'factor investing' because it relies on identifying the key factors and then using them to build portfolios.

"DSP has been the first mover in launching passive funds using the Equal Weight Strategy in India and we are excited to launch the first ETF tracking Nifty 50 Equal Weight index in the country," said Kalpen Parekh, MD & CEO, DSP Investment Managers.

Here are the key details of the new fund offer:

About the strategy
The newly-launched fund is an exchange-traded fund (ETF) that would mimic the 'Nifty 50 Equal Weight TRI'. The latter comprises Nifty 50 stocks but with different weighting methodology. Here, each stock would have an equal allocation of 2 per cent in the portfolio rather than the traditional market-cap weights of constituent stocks in the Nifty 50.

As a result, the new fund would offer more stock-level and sector-level diversification than bellwether indices such as Nifty 50. This can be clearly articulated from a comparison of top stocks and top sector allocation between the two. The AMC has highlighted in its investor presentation that in the Nifty 50 Index, the weight of the top stock, i.e., Reliance (10.7%), is approximately equal to the weight of the bottom 17 stocks as of September 30. In contrast, the underlying index of the new fund gives every stock an equal potential to contribute to the performance. Further, the top 5 sectors in the Nifty 50 index make up roughly 83 per cent while it is only around 65 per cent for its equal weight variant.

The fund house had previously launched an index fund on the same theme in 2017. With this NFO, the AMC seeks to cater to those investors who might prefer the stock exchange route of investing via their demat account, as one can see from the growing ETFs popularity.

Since you will get a large-cap-heavy portfolio with this fund, replicability of the index should not be a problem. This is further validated by the fact that the similar themed index fund - DSP Equal Nifty 50 Fund has a low one-year tracking error of 0.07 per cent against the 1Y average tracking error of 0.15 per cent in large-cap funds as on September 30, 2021. Apart from this, two other funds track the index under consideration, one by Aditya Birla and the other by HDFC AMC. Being launched in June- and August 2021, respectively, both are new and cannot be meaningfully analysed.

About the performance
We compared the calendar year returns of Nifty 50 Equal Weight TRI and Nifty 50 TRI since their inception in November 1995. What we found was indeed a nip and tuck fight between the two, with each of them scoring above the other 13 times in these 26 years (including YTD 2021).

We also compared the five-year rolling returns to get a better long-term picture of equity investing. The result shows that the underlying index of the new fund has consistently beaten the broader index by quite a wide margin till mid-2008. However, the subsequent performance has been broadly neck-to-neck between the two. But investors should note that these are historical trends and cannot be extrapolated into the future.

About the AMC
Managing total assets of around Rs 1.07 lakh crore, DSP ranks among the top 10 AMCs in India (as per data of open-end funds as on September 30, 2021). Out of this, Rs 59,000 crore pertains to equity funds spread across 21 schemes.

However, when it comes to passive equity (index funds/ETFs), the fund house currently manages a meager Rs 528 crore. Apart from the fund investing in the Nifty 50 Equal Weight index as discussed above, the other two equity index funds run by the AMC track Nifty 50 and Nifty Next 50 indices. Both of them have a lower expense ratio and one-year tracking error compared to the average of all other index funds tracking the same index.