India’s first ETF based on equal weight strategy launched by DSP Investment Managers

• Follow

Mutual funds can be an excellent approach for young investors to experience market volatility while also seeking capital appreciation. Mutual funds are classified based on their distinct qualities, such as the objective, risk profile, and benchmark. This way, mutual funds can accommodate investors with various investment objectives and provide nearly everyone with a unique investing strategy.

That said, exchange-traded funds (ETFs) are mutual funds that can be traded on the stock market, like stocks and shares of publicly traded corporations. Exchange-traded funds, or ETFs, often track an underlying index as their benchmarks, such as gold, PSU banks, Sensex, or Nifty.

DSP Investment Managers recently announced the launch of the DSP Nifty 50 Equal Weight ETF, the country’s first exchange-traded fund based on the Nifty 50 Equal Weight Index. Each stock in an equal weight index receives the same weight. This means stock weights are all equal, and it does lower stock-specific risk and sector concentration.

Investment strategy

The strategy, if applied to Nifty 50, the equal-weighted index will own the same 50 companies as Nifty 50 and have 2% weight to each company. However, when it comes to the current market cap weight design, some stocks get large weights like 9-10%, and many stocks in the lower tail get only 0.3%.

Under this strategy of the equal-weighted index, all companies in the index will get an equal chance to contribute to returns rather than being overly dependent on the top 10.

That said, the DSP Equal Nifty 50 ETF is guided by two fundamental investment principles: investing in sector leaders that can weather market cycles and diversifying across firms and sectors through equal stock weightings that offer lower stock-specific risks and sector concentration than the Nifty.

Apart from offering a diversified portfolio at a low cost, the Nifty 50 Equal Weight ETF also benefits from ease of purchase and real-time trading. Quarterly, the Equal Weight Index is rebalanced.

Management view

As per Anil Ghelani, CFA, Head – Passive Investments & Products, DSP Investment Managers, equal weighting leverages market inefficiencies produced by behavioural biases, as the strategy is unaffected by excessive optimism in some stocks and excessive pessimism in others. These inefficiencies have enabled equal weight index strategies to outperform market capitalisation-based index strategies.

“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. When we studied this concept of equal-weight indices globally, we noticed that over long periods equal weighting tends to earn better returns than market cap-weighted indices,” said Kalpen Parekh, MD & CEO, DSP Investment Managers.

What should investors know?

– Investment in equity and equity-related securities covered by NIFTY50 Equal Weight Index is subject to tracking error.

– Minimum application amount is Rs 5,000 and in multiples of Re 1/- thereof.

– The scheme falls under the ‘very high’ risk category, and therefore investors should consult their financial advisers to check the product suitability.

– Entry and exit load is nil.