DSP to Launch a New Passive Fund to Target Top 10 Nifty 50 Companies

DSP Mutual Fund is set to launch a unique passive fund or ETF that will equally invest in the top 10 companies of the Nifty 50 index. This move comes at a time when investor interest is shifting towards mid and small-cap stocks, leaving large-cap companies relatively undervalued.

The proposed fund will focus on heavyweight stocks like HDFC Bank, Reliance Industries, ITC, TCS, Infosys, and Kotak Mahindra Bank, collectively known as ‘HRITIK’ on Dalal Street. Together, these companies constitute 40% of the Nifty 50. Interestingly, the market capitalisation share of these top ten companies has dwindled to around 20%, an all-time low compared to the broader market.

While equal-weighted funds for the Nifty 50 and Nifty 100 already exist, a fund exclusively tracking the top 10 Nifty stocks is a novel concept. This concentrated portfolio is a strategic bet on the potential of these large-cap giants to outperform in the future. Historical data since 2006 indicates that a Nifty top 10 equal-weighted index has outperformed broader indices like Nifty 50, Nifty 100, and Nifty 500.

Sahil Kapoor, Market Strategist at DSP Mutual Fund, argues that despite contributing significantly to market capitalisation, profits, and free cash flow, large-caps have been relatively overlooked by investors. This, he believes, has created a favourable entry point for these stocks. The fund primarily focuses on sectors like banking, IT, and FMCG, which have underperformed the broader market this year, making them potentially attractive investments.

The fund’s launch coincides with a growing trend of retail investors embracing factor-based passive funds. Assets under management in this category have quadrupled in the past year. However, experts caution that timing is crucial for such funds. While they can be part of a diversified portfolio, they should not replace broad market indices like the Nifty 50. Investors must carefully consider their investment horizon and risk appetite before making a decision.

DSP Mutual Fund’s strategy is based on the concept of market cycles. They believe the market is transitioning from a ‘depolarisation’ phase, where a wide range of stocks drive returns, to a ‘polarisation’ phase, where a few large-cap stocks dominate performance. However, the success of this fund will depend on whether this prediction holds true. The new fund’s NFO is open from August 16 to 20.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.