These heavyweights (HDFC Bank, Reliance Industries, ITC, TCS, Infosys and Kotak Mahindra Bank, collectively known as Hritik on Dalal Street) account for 40% of the Nifty 50 index.
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Data compiled by DSP MF shows that the market capitalisation share of the top ten companies on Nifty is hovering around 20%, a record low compared to the overall universe of stocks.
There are funds with equal weighting for both Nifty 50 and Nifty 100 indices in the industry, but none track the equal weighting of the top 10 stocks in the Nifty index.
“Retail investors have been under-investing in megacaps of late, favouring high-yielding midcaps and smallcaps, but they are expected to regain popularity,” said Nirav Karkera, head of research at Fisdom.
The new fund launch will be a more concentrated portfolio that bets on big companies getting bigger. Since 2006, the equal-weighted Nifty top 10 index has also outperformed the Nifty 50, Nifty 100 and Nifty 500 indices.
“Large-cap companies account for 70% of the market capitalisation, over 70% of the earnings and over 75% of the free cash flow, but they are getting 10% of the flows,” said Sahil Kapoor, market strategist at DSP Mutual Fund. “This part of the market has been underperforming, so there is no price froth.”
Kapoor added that sectors such as banks, technology and FMCG have underperformed the broader markets, and he believes they are available at attractive valuations as they have underperformed the broader markets.
The top 10 companies are comprised primarily of stocks from the banking, IT and FMCG sectors. This year, the Nifty 500 is up 30%, while the Nifty IT, Nifty FMCG and Nifty Bank are up 22%, 15% and 7% respectively.
Retail investors in India have been receptive passive factor-based funds to their wallets. Mint had previously reported that assets under management of factor-based funds rose fourfold in the year to July from ₹7.050 crore rupees ₹26,363 crores.
Will the market applaud HRITIK’s comeback?
DSP’s Kapoor has a narrative. There is something called polarisation phase, when a few stocks make most of the gains. In 2018 and 2019, HRITIK’s stock rose 19% each year, while the broader markets (Nifty 500) fell 2% in 2018 and rose 9% in 2019.
Kapoor argues that we could be entering a polarisation phase, where a few stocks drive most of the market’s gains, a trend seen in 2018 and 2019, when HRITIK’s stock outperformed the broader market.
Instead, in recent years we have seen a phase of depolarization, with returns driven by a broader range of stocks.
Of late, the market has been the opposite of a polarised market. From March 2020 to July 2024, the top 10 equal-weighted Nifty index delivered a compound annual growth rate (CAGR) of 27%, while the Nifty 500 returned 24%. Depolarisation occurs when a large number of stocks drive overall market returns, while a few heavyweights underperform.
“The last few years are a reflection of a phase of depolarization,” Kapoor said. “We are banking on a phase of polarization now.”
He new fund offering The call for proposals for this programme will be open from 16 to 20 August.
Should you invest?
Investors need to choose the right time to invest in such funds, said Bhavana Acharya, Head – Mutual Funds and Equities, Prime Investor. The top 10 stocks are mainly from banking, IT and FMCG and an investor needs to be convinced that these sectors will outperform in the future. “Ask yourself if you expect these sectors to move,” said Acharya.
Such a plan can be part of your overall portfolio, but you should not use it as a substitute for owning broad market indices like the Nifty 50, Acharya added.
“After all, these are exotic strategies, but broad market indices offer basic returns that are not worth missing.”
It is important to be clear about what these strategies are trying to achieve and not lose sight of that, he said, adding that most investors should not bet on when the market-cap segment will outperform.
Acharya advises investors to stick to a certain asset allocation and rebalance at defined intervals rather than predicting the markets.
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