Automatic Profit Counting: Launching an Index Fund with a Difference – Check How It Works

An equal allocation to the 50 large-cap companies can benefit from growth opportunities across the board rather than relying on the performance of a few index heavyweights.

For index fund investors, here is another opportunity to invest only in index stocks but with a difference. Aditya Birla Sun Life AMC has launched the Aditya Birla Sun Life Nifty 50 Equal Weight Index Fund, an open-end program that tracks the Nifty 50 Equal-Weight TR Index. The NFO opened on May 19, 2021 and will close on June 2, 2021.

The Nifty 50 Equal Weight Index Fund is different from a conventional index fund. This is because the Nifty50 Equal Weight Index represents an alternative weighting strategy to its parent index based on market capitalization, the Nifty50 50 Index. The index includes the same companies as its parent index, but equally weighted .

All components of the Nifty 50 Index are part of the Nifty 50 Equal Weight Index. But, unlike Nifty 50 which is based on market capitalization and the higher the market capitalization of a company, the higher the weighting of the stock in the index, the equal weighted index treats them all of the same way, regardless of their relative market capitalization.

The index keeps the constituent companies’ allocation close to 2% each.

The advantages of an equal weight index fund are:

  • There is broader sector representation and greater diversification at the stock level.
  • Concentration risk is significantly reduced at the level of an individual stock and at the level of the sector as a whole.
  • The index is automatically replenished every 6 months online with the Nifty 50, allowing a natural selection of the best players.
  • Automatic profit booking: Additionally, the portfolio is rebalanced on a quarterly basis, which leads to intelligent and periodic profit booking. The way it works is that since each stock must have a 2% allocation, if a stock’s allocation increases as a result of market action, on the rebalance date, the excess percentage of the stock will be sold, resulting in automatic profit booking. Proceeds will be reinvested in stocks that have fallen and have an allocation of less than 2%.

Commenting on the launch of the new fund, A. Balasubramanian, MD and CEO, Aditya Birla Sun Life AMC Limited said, “An equal allocation to the 50 large-cap companies can benefit from growth opportunities at all levels rather than relying on the performance of some heavyweights. With a period of widespread economic recovery on the anvil, high growth sectors like cement and cement products, pharmaceuticals, metals and services are better represented in the Nifty 50 Equal Weight Index. Over time, as markets and the economy develop, we expect the Equal Weight (EW) Index to do better than the Nifty 50. It has outperformed the Nifty 50 over short and long periods. long term. In fact, some of the equity level biases in the core index that we saw in 2018-19 are already reversing strongly. In this environment, the Sun Life Nifty 50 Aditya Birla Equal Weight Index Fund is a smart and simple investment option that offers the opportunity to take advantage of the country’s broad-based economic growth.”

These equally weighted index funds are suitable for investors looking to reduce active stock selection risk by investing in a passive investment strategy for at least 5-year targets.