Nifty 500 Index – What’s inside?

Everyone who has been reading “The Psychology of Money” by Morgan Housel has been thinking of making investing life easier and so just buy the entire market (in a mix of domestic and international index funds). For India exposure, the option considered is that of Nifty 500 Index Fund. Why?

The index that represents 500 companies based on full market capitalisation and 96.1% of the free-float market cap. Basically, most of the good, bad and ugly of the stock markets.

Package this into a low cost index fund and you have a simple investment that is likely to work for you over the next few decades.

Things that will work out for you with the Nifty 500 Index fund:

1. An easy decision. No need to chase fund manager, market caps, sub allocations, etc. Just one market, one fund.
2. More tax efficient than owning a bunch of funds and trying to move money from one to another.

Things that will NOT work out for you with the Nifty 500 Index fund:

1. No chasing alpha, if there is any. In fact, this may not even turn out as the top performing fund at any given point of time.
2. While you have the entire market for you, currently the numbers of the fund will be determined by the movement in large stocks (top 50 or top 100). There is high correlation with Nifty 50.

What’s better than Nifty 500 Index?

See table below for the breakup of Nifty Indices.

The question to ask is whether the Nifty 50 or Nifty 100 fund makes more sense then, instead of the Nifty 500?

Let me add one more fact.

Currently, the Motilal Oswal Nifty 500 Index Fund is the only one on offer which tracks the said index. With close to Rs. 300 crores in assets, it operates at a 0.38% expense ratio in direct plans (assuming you are investing on your own without a distributor).

There are a number of index funds based on Nifty 50, Nifty Next 50 or even Nifty 100. They have assets in 1000s of crores and run at much lower expenses. A Nifty 50 based index fund for less than 0.2% and Next 50 for less than 0.3%.

The size of the assets can influence the tracking error or the margin by which your fund can have a different return than the index. This is over and above the expense ratio. The larger fund should have, ideally, a less tracking error.

All this adds up.

In your view, which index will Morgan Housel go for?