HDFC Nifty Top 20 Equal Weight Index Fund: A Balanced Bet or a Volatile Ride?

HDFC Mutual Fund has launched HDFC Nifty Top 20 Equal Weight Index Fund, it is an open-ended scheme replicating / tracking Nifty Top 20 Equal Weight Index (TRI).

The current market scenario is marked by high volatility, corrections, and a slump in NAVs across equity mutual funds, raising concerns for investors. In such an environment, the HDFC Nifty Top 20 Equal Weight Index Fund, which equally distributes exposure across the top 20 Nifty stocks, presents a mixed case.

[Read: Are Passive Funds the Better Choice in a Volatile Equity Market?]

The fund's portfolio includes leading stocks across sectors, but not all sectors perform uniformly during volatile times. With current uncertainty in both global and domestic markets, investors must assess whether they have the risk appetite and patience to withstand near-term fluctuations.

What will be the investment strategy for HDFC Nifty Top 20 Equal Weight Index Fund?

HDFC Nifty Top 20 Equal Weight Index Fund will be managed passively with investments in stocks comprising the Underlying Index subject to tracking errors.

The investment strategy would revolve around reducing the tracking error to the least possible through regular rebalancing of the portfolio, taking into account the change in weights of stocks in the Index as well as the incremental collections/redemptions in the Scheme. A part of the funds may be invested in debt and money market instruments, to meet liquidity requirements.

About Nifty Top 20 Equal Weight Index

NSE Indices has developed the Nifty Top 20 Equal Weight which aims to track the performance of the top 20 stocks selected based on 6-month average free-float market capitalization from the Nifty 50.

However, instead of assigning weights based on market cap, every stock in the index is given an equal 5% allocation at the time of rebalancing. Since all 20 stocks have equal weight, the performance is not overly dependent on a few heavyweight companies.

Unlike traditional market-cap-weighted indices where larger companies get a higher allocation, this index ensures that each of the 20 stocks holds the same proportion, reducing concentration risk and offering a more balanced exposure.

How will the scheme allocate its assets?

Under normal circumstances, HDFC Nifty Top 20 Equal Weight Index Fund will hold an allocation of 95% to 100% in Securities covered by Nifty Top 20 Equal Weight Index (TRI) and 0% to 5% in Debt Securities & Money Market Instruments, Units of Debt Schemes of Mutual Funds.

Should investments in HDFC Nifty Top 20 Equal Weight Index Fund be considered?

HDFC Nifty Top 20 Equal Weight Index Fund is an index fund that passively tracks the performance of the top 20 stocks from the Nifty 50 with equal weight allocation. In contrast to market-cap-weighted funds where the top companies hold major weights, this fund allocates equal weightage to each stock, which could minimize concentration risk.

This approach enables mid-cap companies in the top 20 to contribute more to returns than conventional Nifty-based funds. This strategy is said to be beneficial in market cycles when mid-sized large-cap stocks outperform the top-heavy leaders. But it may underperform in strong bull runs based on a few large-cap stocks.

Another significant factor is that, equal-weighted funds normally see greater volatility than market-cap-weighted funds as midsized large-cap stocks tend to have more price fluctuations. Passive equal-weighted funds also tend to have marginally greater expense ratios as a result of need for regular rebalancing. Investors ought to balance this with their risk tolerance and horizon.

Historically, equal-weighted indices perform better during market recoveries since they allow the performing midsized large cap stocks to contribute more to returns. In light of the prevailing market environment, an equal-weight strategy may not necessarily cushion investors from declines.

Since the Indian economy is still inherently robust, with favourable long-term growth drivers, this fund could be a good choice for investors with a long-term perspective to overcome the short-term turbulence. Patience is key, as near-term volatility is anticipated due to global and domestic market pressures.