129012Pay attention to these 9 things before investing in hybrid mutual funds
Investors choosing to take exposure to this index would have the opportunity to combine index and factor investing
At a time when frontline indices are hovering near all-time highs, making fresh investment into equities may seem like a challenging proposition. At such times, what one could consider investing with a value focus which can help provide a reasonable margin of safety to the portfolio by avoiding expensive picks. Many legendary investors, over the years, have built successful portfolios by adhering to value investing.
While there are several offerings based on value investing on the active side, if you are a passive investor and is looking for a value index based offering then you may consider the ETF or index fund based on the Nifty 50 Value 20 Index. As the name suggest, this index comprises of the top 20 value picks from India’s top bluechip benchmark – Nifty 50.
Investors choosing to take exposure to this index would have the opportunity to combine index and factor investing. Such an offering will be a healthy addition for investors looking to build a portfolio for the long term.
Here is how the Nifty 50 Value 20 combines the best of index and factor investing.
Driven by the value factor:
There are multiple styles of investing in the market. Asset class price movements can be explained by various underlying factors. So, we have factors such as dividend yield, low volatility, alpha, value, quality and momentum among a few others. Based on these factor, an index is constructed comprising of a set of stocks that make it past a particular factor’s filtering criteria.
When it comes to the Nifty 50 Value 20 index, the index is made up of 20 most liquid value stocks drawn from the Nifty 50 index. Stocks are selected based on the ranking arrived at by scoring key value parameters – return on capital employed (ROCE), price earnings ratio (PE), price to book ratio (PB) and dividend yield.
ROCE is given a 40% weightage and PE is accorded 30% weightage. PB and dividend yield are given 20% and 10% weightages, respectively. Stocks with higher ROCE and dividend yield would get higher ranks, while those with higher PB and PE would be given lower ranks. The maximum weightage to an individual stock is restricted to 15%.
The constituents of this index is reviewed and rebalanced annually, while the weightage realignment is done on a quarterly basis.
Investing in the benchmark via the index fund can be a good way to gain exposure to top bluechip value stocks. No fund manager bias would affect the portfolio.
Also, it provides a low-cost, transparent and convenient mode of investing via both lump-sums and SIPs (systematic investment plans) for the long term. All you need to do to track the performance is to track the index.
Scoring on consistency:
Even as the Nifty 50 Value 20 index is anchored to valuations, it has delivered healthy returns over the years. When point-to-point returns (CAGR: compound annual growth rate) over the past one, three, five and 10-year periods are taken, the index has delivered strongly and has outperformed the Nifty 50 TRI.
When rolling returns over the past 11 years (January 2013 to January 2024) are taken, the Nifty 50 Value 20’s consistency comes through. If 5-year daily rolling returns over January 2013-January 2024 is considered, the index has been consistent. The mean returns on a 5-year rolling basis is a healthy 15.09%, outperforming the Nifty 50 TRI. Also, over this period of rolling return measurement, the Nifty 50 Value 20 TRI has beaten the Nifty 50 TRI over 93% of the times, suggesting a fair degree of consistency in performance.
The value index also scores when it comes to investing via the SIP mode. Across timeframes, it has given robust returns, with a 10-year SIP yielding as much as 22.06% (XIRR). Given that value investing also follows a cycle as does any factor with the ebb and flow of the market, taking the SIP route would suit retail investors well as it ensures cost-averaging and relatively lower volatility to the portfolio.
On key metrics, the Nifty 50 Value 20 index, true to its mandate, scores with lower valuations.
As seen above, the P/E (18.5 times) and P/B (3.4 times) are lower than the Nifty 50 TRI’s metrics, while the dividend is higher at 2.44%.
To conclude, value investing as a style tends to work well over the long term. Investors can consider taking an exposure to the Nifty 50 Value 20 index either through an index fund or an ETF as a part of one’s portfolio.
The author is Principal – Investment Strategy, ICICI Prudential AMC. Views are personal.
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