My analysis of Nifty Top 10 Equal Weight Index

What is this Index about? #

NSE Indices has developed the Nifty Top 10 Equal Weight Index which aims to track the performance of the top 10 stocks selected based on 6-month average free-float market capitalization from the Nifty 50. Nifty Top 10 Equal Weight Index can be used for a variety of purposes such as benchmarking fund portfolios, launching of index funds, ETFs and structured products.

My opinion on this Index #

This is a super concentrated index comprising of 10 largest of the large cap stocks. It's always advised to have a diversified portfolio to mitigate concentration risk, and not be over leveraged in a single company or sector.

This index, unfortunately, is at risk from all of these facets. Since it has only 10 stocks, any adverse situation impacting these companies like policy changes, enabling of windfall tax will cause this Index to fall sharply. The downsize protection is not great here IMO.

Decoding the data points #

Total returns #

This Index is stated to have a 1 year return at 20.32, 5 year return at 16.61 and all time (about 18 year) return at 14.65. Compare this to Nifty 50 where the 1 year return is at 27.84, 5 year return at 18.92 and 15 year return at 11.8.

Duration	Nifty Top 10 Equal Weight	Nifty 50	Nifty 50 Equal Weight
1 year	20.32	27.84	38.10
5 year	16.61	18.92	22.38
15 year	14.65	11.8	14.88

Compared to Nifty 50 Equal Weight the returns are lower across all time horizons. Nifty 50 also provides better returns compared to Nifty Top 10 Equal Weight, except for the 15 year value. Will need to revisit this observation after crunching the rolling returns.

Standard Deviation #

Standard deviation shows you the delta between the max and min return values. So for an index, if the average return is 10 and the standard deviation is 4, then the returns will vary between [10+4, 10-4] or, [14, 6]. Having a high standard deviation is generally not good. Let's take a look at standard deviation values between these three Indices.

Duration	Nifty Top 10 Equal Weight	Nifty 50	Nifty 50 Equal Weight
1 year	12.16	12.37	13.05
5 year	19.59	19.22	18.83
Since Inception	22.77	22.94	22.37

Long term standard deviation for all three is (almost) equal. No clear winners here. Both Nifty 50 and Nifty 50 Equal Weight have greater or lower standard deviation compared to Nifty 50.

Beta #

Looking at the Beta values, it's clear that Nifty 50 Equal Weight is less volatile compared to Nifty 50. However for Nifty Top 10 Equal Weight this can vary between lower to more than Nifty 50 volatility. The con of having a more concentrated portfolio. Investors looking at a better alternative than Nifty 50 purely in terms of volatility, should consider Nifty 50 Equal Weight. Sadly, Nifty Top 10 Equal Weight provides no benefit in this regard.

Duration	Nifty Top 10 Equal Weight	Nifty 50	Nifty 50 Equal Weight
1 year	0.89	1	0.98
5 year	0.99	1	0.94
Since Inception	1.02	1	0.94

Correlation factor #

Duration	Nifty Top 10 Equal Weight	Nifty 50	Nifty 50 Equal Weight
1 year	0.93	1	0.96
5 year	0.97	1	0.96
Since Inception	0.97	1	0.96

Here again between Nifty Top 10 Equal Weight and Nifty 50 Equal Weight there is no difference, and hence, the new Nifty Top 10 Equal Weight Index provides no benefit in this regard either.

Dividend Yield #

Nifty Top 10 Equal Weight is the clear winner here. Given the concentrated portfolio of top stocks, this would be expected. For investors interested in dividend yield, the Nifty Top 10 Equal Weight can be preferred.

Nifty Top 10 Equal Weight	Nifty 50	Nifty 50 Equal Weight
1.31	1.19	1.18

Summary #

Nifty Top 10 Equal Weight fails to provide better returns than Nifty 50 or, ``Nifty 50 Equal Weight`. Will need to revisit this after calculating rolling return values for similar durations.
Nifty Top 10 Equal Weight is slightly lower to more volatile than Nifty 50. Nifty 50 Equal Weight is better than Nifty Top 10 Equal Weight in this regard, and historical data shows it to be less volatile than Nifty 50. No clear advantage in favour of Nifty Top 10 Equal Weight.
Nifty Top 10 Equal Weight has a higher dividend yield compared to Nifty 50 and Nifty 50 Equal Weight.
For both Nifty Top 10 Equal Weight and Nifty 50 Equal Weight, the correlation factor is (almost) equal. Again, no clear benefit to Nifty Top 10 Equal Weight.
Given the above points, most investors should prefer investing into Nifty 50 or Nifty 50 Equal Weight over this new Nifty Top 10 Equal Weight index. Since Nifty Top 10 Equal Weight has only 10 stocks, it (probably, not always) won't be well diversified into sectors and the lower number of stocks also puts it at a higher concentration risk compared to Nifty 50 or Nifty 50 Equal Weight. Neither does Nifty Top 10 Equal Weight provide better risk adjusted return compared to Nifty 50 or Nifty 50 Equal Weight.

Disclaimer #

This post is not an investment advice. I am sharing my opinion based on factual data. Please do your own analysis.

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