Nippon India Nifty 50 Value 20 Index Fund Analysis

Basic Details

Investment Approach

• The fund will invest in equity and equity-related securities and portfolio replicating the composition of the Nifty 50 Value 20 Index, subject to tracking errors
• Upto 5% of the assets can be invested in Money Market instruments, Reverse repo and / or Tri-Party Repo and/or Schemes which invest predominantly in the money market securities or Liquid Schemes

What is the Nifty 50 value 20 index?

• This index chooses 20 stocks from the Nifty 50 based on certain criteria which indicate value.
• Stocks are selected on the basis of ROCE (Return on Capital Employed), P/E, P/B and Dividend Yield. Relatively lower P/E and P/B stocks from the Nifty 50 get a better rank, while higher Dividend Yield and ROCE receive a better rank. 
• Value rank of each stock is determined using criteria of Low PE (30% weight), low PB (20% weight), high dividend yield (10% weight) and high ROCE (40% weight). The top 20 are then chosen as part of the index. 
• Each constituent in the index is capped at 15%.

Current constituents of Nifty 50 value 20 Index

The table below shows the current constituents of this index.

• The top 5 companies include Infosys, TCS, HUL, ITC and L&T.

What works for the fund

• Outperformance wrt Nifty 50: The Nifty Value 20 Index has comfortably outperformed Nifty in the last 5 year period (as seen in the chart below). However, the inception date for this index is March 2014, and hence the fund does not have a 10-year track record.

• Lower risk as compared to Nifty 50: The fund has a lower Standard Deviation and Beta as compared to Nifty 50 index. This is impressive, as this index has delivered better returns than Nifty 50 with a lower risk profile.

• More favourable valuations as compared to Nifty 50: Given its value tilt, the index is trading at more favourable valuations (lower P/E, lower P/B) as compared to Nifty 50. It also has a higher dividend yield.

Cons

• Limited performance history (Started only in March 2014). 
• Given the recent rally, even the "value stocks" among the Nifty 50 are trading at very high valuations. The fund could be impacted in case of a correction.

Final take

While the performance history is limited, the fund seems to be a good alternative to buying the Nifty 50 index, given its lower risk and higher return profile historically. The fund is also expected to have a lower drawdown as compared to Nifty 50.