Nifty Top 10 Equal Weight Index: the top 10 reasons to invest

In the Indian equities market, the 100 biggest stocks by market cap are considered to be large-caps.

Now, you might wonder: would the benefits of large-caps get amplified if you distilled them to create an index comprising only the 10 biggest stocks?

There’s a good chance that the answer is ‘yes’. In this post, we’ll present ten reasons why a fund tracking such an index, namely the Nifty Top 10 Equal Weight Index (henceforth, ‘the Nifty 10 index’), might be a good pick for investors.

A quick aside: the Nifty 10 index is 'equal-weighted', which means that every constituent stock's performance has an equal impact on the index value. This is in contrast to a market-cap-weighted index, where a constituent stock with a bigger market cap can move the index more easily compared to a constituent stock with a smaller market cap.

1. Superior long-term performance

The Nifty 10 index has posted a better CAGR than broader market indices over the last 18-odd years.

2. Consistency across investment horizons

The median rolling returns (i.e. the most likely returns over a given horizon) of the Nifty 10 index are better than those of broader market indices over horizons of 1, 3, 5, and 10 years.

3. Relative outperformance on the way?

The chart below indicates the 3-year rolling alpha (i.e. outperformance) of the Nifty 10 index relative to the Nifty 50 index.

What’s important to note here is that so far, whenever the 3-year historical alpha has been negative, the forward 3-year alpha has always been positive. Thus, since the current 3-year historical alpha is negative, there’s a good chance that it might turn around in the near future.

4. Favourable market cycles

The chart below indicates the proportion of the top 10 stocks’ market cap with respect to the total market cap of all listed stocks. As can be seen, the share of the top 10 stocks is currently at an all-time low. This has happened due to ‘depolarisation’, i.e. a broad-based rally in stocks.

However, in the event of a ‘polarisation’, i.e. a rally involving only the top 10 stocks, the Nifty 10 index will outperform the broader market.

Polarisation and depolarisation are cyclical phenomena, as can be seen from the chart. Given that there has been significant depolarisation over the last four years, a polarisation might be due; this would then bolster the Nifty 10 index.

5. Lower drawdowns despite higher volatility

Despite having a slightly greater volatility due to its concentrated portfolio, the Nifty 10 index still posts annual drawdowns that are usually lower than those of broader market indices, as can be seen in the table below.

6. Attractive price to earnings (P/E) ratio

The P/E ratio is a metric used to determine whether a stock or index is overpriced or underpriced. As can be seen below, the Nifty 10 index has a more attractive P/E ratio compared to broader market indices relative to its history.

7. Attractive price to book (P/B) ratio

The P/B ratio is yet another metric used to determine whether or not a stock or index is expensive. In this regard as well, the Nifty 10 index fares better than broader market indices.

8. Good value relative to market

We could also divide the Nifty 10 index’s P/E ratio by the Nifty 50 index’s P/E ratio to compare their relative valuations. As the graph below indicates, the Nifty 10 index is currently in a favourable zone in terms of its relative valuation. This is also true if the Nifty 10 index’s P/E ratio is compared with the Nifty 500 index’ P/E ratio.

9. Strong RoE and RoA

The Nifty 10 index has delivered significantly higher Return on Equity and Return on Assets (RoE and RoA respectively: two important measures of a company’s financial performance) compared to broader indices.

10. Learning from international markets: a US comparison

Lastly, if we were to look at the equivalent of the Nifty 10 index for the US equities market, i.e. the ‘S&P 500 Top 10 Index’, we would find that this index has outperformed the broader US market (as represented by the S&P 500 Index) over the last 19-odd years.

Time for the biggies to shine?

As discussed above, the very biggest Indian stocks might potentially represent an opportunity right now, and it might be a good idea to take a position in them while they're still relatively undervalued as a group.

Speak with our experts to get personalised advice and take the next step in your investment journey.