Nifty 500 Equal Weight Index Vs Nifty 500 Index

Recently NSE launched a new Index called Nifty 500 Equal Weight Index. Is it better than Nifty 500 Index in terms of risk and return? Let us find the answers.

In my previous article regarding the Nifty 500 Index, I demonstrated the reasons why it is not a suitable index for investment. I suggest you to refer the same for further clarity “Should We Invest In Nifty 500 Index Fund?“.

Since its recent launch, there are currently no Index Funds available to match this Index. However, it is worth mentioning that new fund offerings in this category may emerge in the near future. Hence, I have taken the initiative to write an article well ahead of time.

The general consensus is that the equal weight Index is expected to reduce risk, as seen in the comparison between the Nifty 50 Index and the Nifty 50 Equal Weight Index. It seems that the Nifty 500 Equal Weight Index might have lower volatility than the Nifty 500 Index. However, the actual results contradict this belief.

What is the Nifty 500 Equal Weight Index?

The Nifty 500 Equal Weight index represents an alternative weighting strategy to its parent index, the Nifty 500. It includes the same companies as the Nifty 500, however, weighed equally. The base date for the index is April 01, 2005, and the base value is 1000.
The index is reconstituted on a semi-annual basis and weights are rebalanced on a quarterly basis. The index is expected to act as a benchmark for asset managers and a reference index tracked by passive funds in the form of Exchange Traded Funds (ETFs), index funds, and structured products.

The Nifty 500 index represents the top 500 companies selected based on full market capitalization from the eligible universe. Nifty 500 Index is computed using the free float market capitalization method, wherein the level of the index reflects the total free float market value of all the stocks in the index relative to a particular base period.

The Nifty 500 Index was created with a starting value on January 1, 1995, and is rebalanced every six months. As of April 30, 2024, the sector allocations are as follows: Financial Services at 29%, Oil, Gas, and Consumable Fuels at 9%, IT at 8.8%, Automobile and Auto Components at 7%, and FMCG at 7%.

Let’s examine the top stocks in the Nifty 500 index. A notable 58% of these stocks are part of the Nifty 50 index, while around 14% come from the Nifty Next 50 Index. This means that a substantial 72% of the Nifty 500 stocks are from Nifty 100. The remaining 28% of stocks are from the mid and small-cap sectors.

Nifty 500 Equal Weight Index Vs Nifty 500 Index – Which is the best?

The Nifty 500 Equal Weight Index was established on the 1st of April 2005, therefore, we need to analyze the data from that date up to the current date. In my analysis, I will be considering the Nifty 500 Equal Weight Index TRI, Nifty 500 TRI, and Nifty 100 TRI for comparison. Hence, we have around 4755 daily data points to look into and arrive at the decision.

Let us begin by examining the trajectory of these three indices if an individual had invested Rs.1,00,000 in each of them on April 1, 2005.

The Nifty 100 Index TRI, Nifty 500 Index TRI, and Nifty 500 Equal Weight Index TRI yielded final values of Rs.15,23,734, Rs.15,22,563, and Rs.16,11,436 respectively for an initial investment of Rs.1 lakh. It is worth noting that the outperformance of the Nifty 500 Equal Weight Index can only be observed over the past 2 years, as visualizing its performance before that period is limited.

Let’s examine the drawdown chart. This serves as a clear indication of the potential decrease in your invested value from its highest point between April 1, 2005, and June 3, 2024.

The decline in Nifty 500 Equity Weight TRI in comparison to Nifty 100 TRI and Nifty 500 TRI is significantly larger. This is primarily due to its increased allocation to Mid and Small Cap Funds.

Let us now check the performance of all three by comparing 1 Year, 3 Yrs, 5 Yrs and 10 Yrs Rolling Returns.

1 Yr Rolling Returns – Nifty 100 TRI Vs Nifty 500 TRI Vs Nifty 500 Equal Weight TRI

Notice that there is no such greater difference between Nifty 100 TRI and Nifty 500 TRI. However, the Nifty 500 Equal Weight TRI is hugely volatile in nature.

The Nifty 500 Equal Weight Index TRI has shown outpeformed compared to the Nifty 100 TRI and Nifty 500 TRI in nearly 45% of instances. Conversely, in the remaining 55% of cases, it exhibited underperformance relative to both indices.

3 Yrs Rolling Returns – Nifty 100 TRI Vs Nifty 500 TRI Vs Nifty 500 Equal Weight TRI

For 3 years of rolling returns also, the results are the same. You can easily visualize the volatility it poses than Nifty 500 TRI and Nifty 100 TRI.

In case of performance consistency, Nifty 500 Equity Weight TRI outperformed the Nifty 100 TRI for 54% of the time and 55% of the time with respect to Nifty 500 TRI.

5 Yrs Rolling Returns – Nifty 100 TRI Vs Nifty 500 TRI Vs Nifty 500 Equal Weight TRI

Once more, the volatility of the Nifty 500 Equal Weight Index compared to the Nifty 100 and Nifty 500 has been observed. Additionally, upon examining the consistency of outperformance, it was found that the Nifty 500 Equal Weight Index outperformed the Nifty 100 TRI approximately 39% of the time, and in comparison to the Nifty 500 TRI, it was 48%. The notable decrease in outperformance of the Nifty 500 Equal Weight Index against the Nifty 100 Index suggests that this Index may not be a worthwhile consideration.

10 Yrs Rolling Returns – Nifty 100 TRI Vs Nifty 500 TRI Vs Nifty 500 Equal Weight TRI

Here, even though the consistency score increased to for around 47% compared to Nifty 100 TRI and Nifty 500 TRI, you noticed the volatility it poses to us.

Based on the analysis of the past 19 years, it is evident that the Nifty 500 Equal Weight Index offers a higher level of diversification compared to the concentrated risk of the Nifty 500. However, it is important to note that this index is associated with significant volatility due to its exposure to mid and small-cap stocks. Additionally, the performance of the Nifty 500 Equal Weight Index is not consistent to that of the Nifty 100 and Nifty 500. Therefore, it is advisable to refrain from investing in the Nifty 500 Equal Weight Index and instead focus on the Nifty 100 Index.