Automatic profit booking: Index fund with a difference launched – Check how it works

The fund is an open-ended scheme tracking the Nifty 50 Equal-Weight TR Index.

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

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

All constituents 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 higher the market cap of a company higher the weightage of the stock in the index, the equal-weight index treats all of them equally irrespective of their relative market cap.

The index keeps the allocation of the constituent companies at nearly 2 percent each.

The advantages of an equal-weight index fund are as follows:

• There is a broader sectoral representation and more diversification at a stock level.
• The concentration risk is reduced significantly at an individual stock and overall sector level.
• The index is automatically re-constituted every 6 months in line with the Nifty 50, allowing for a natural selection of top movers.
• Automatic profit booking: Additionally, the portfolio is rebalanced on a quarterly basis, leading to smart and periodic profit booking. The way it works is, since each stock is to have a 2% allocation, if any stock’s allocation increases as a result of market action then on the rebalancing date, the excess percentage of the stock will be sold leading to an automatic profit booking. The proceeds will be re-invested into stocks that have fallen and have less than 2 per cent allocation.

Commenting on the launch of the new fund, A. Balasubramanian, MD & CEO, Aditya Birla Sun Life AMC Limited said, “Equal allocation to the 50 large-cap companies can benefit from growth opportunities across the board rather than relying on the performance of few heavyweights. With a period of broad-based economic recovery on the anvil, high growth sectors like cement and cement products, pharma, metals and services, are better represented in the Nifty 50 Equal Weight Index. Over time, as markets and the economy grow, we expect the Equal Weight (EW) Index to do better than Nifty 50. It has outperformed the Nifty 50 over short and long-term periods. Infact some of the stock level polarisations in the base index that we saw in 2018-19 is already reversing sharply. In this backdrop, Aditya Birla Sun Life Nifty 50 Equal Weight Index Fund is an intelligent and simple investment option that provides an opportunity to capitalize on broad-based economic growth in the country”.

Such equal weight index funds suit those investors who are looking to reduce the risk of active stock selection through investment in a passive investment strategy for goals that are at least 5 years away.