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For investors hesitant about increasing their allocation to large-cap stocks after a rip-roaring rally, there is an alternative to the bellwether Nifty 50 index, where you can invest in an under-valued bluechip portfolio. Enter, the Nifty 50 Value 20 index.
Apart from the valuation comfort and higher dividend yield, the Nifty 50 Value 20 offers better downside protection, which is relevant for fence-sitters who are unable to commit to equity investments fearing a market decline.
The three exchange-traded funds (ETFs) and one newly launched index fund based on the Nifty 50 Value 20 provide investors with a variety of options to choose from.
Value-investing strategy suits those willing to stay invested for a fairly long term with an aim of benefiting from a full investment cycle.
Fundamentals
These are interesting times from a perspective of a value-oriented investment strategy. While easy liquidity, negative real rates and a cyclical recovery in the world economy have baked into robust growth, equity valuations across most stocks are higher than historical averages. Equity valuations across most stocks are higher than historical averages. This is when buying into businesses that are available for less than their intrinsic value in the market, makes eminent sense.
Passive investment instruments such as ETFs and index funds eliminate non-systematic risks like stock-picking and portfolio manager selection, while offering lower costs. In this context, the Nifty 50 Value 20 index presents an attractive opportunity.
It consists of the 20 most liquid, value bluechip companies of the Nifty 50. The portfolio has companies that are compliant to IRDA (Insurance Regulatory and Development Authority) dividend norms, and have relatively lower price to earnings (PE) and price to book (PB), while having higher dividend yield (DY) and return on capital employed (ROCE). Naturally, the portfolio has a lower PE of 26.5 and a higher DY of 2.28 than the Nifty 50.
Portfolio & performance
As on January 29, 2021, the top constituents of the Nifty 50 Value 20 are TCS, Infosys, HUL, ITC, L&T, HCL Technologies, Wipro, Tech Mahindra, Bajaj Auto and IndusInd Bank.
The Nifty 50 Value 20 index offers higher concentration — the top 10 stocks have 80 per cent weight, compared with 61 per cent for Nifty 50.
Also, the sectoral exposure of the Nifty 50 Value 20 is markedly different from that of the Nifty 50. For example, financial services is just a 2.74 per cent exposure for the value index compared with over 38 per cent for the Nifty 50. The Nifty 50 Value 20 is overweight on IT, consumer goods, construction and metals. The index seems positioned to benefit from beneficiaries of accelerated adoption of technology (IT), government capex (industrials), etc.
The Nifty 50 Value 20 total return index has comprehensively beaten the Nifty 50 total index return in one-, three-, five- and 10-year time periods. This outperformance has been achieved with lower volatility. Also, the three ETFs based on the Nifty 50 Value 20 — Kotak NV20, Nippon India NV20 and ICICI Prudential NV20— have shown lower maximum drawdowns than both the Nifty 50 and the large-cap fund category. Performance data for Nippon India Nifty 50 Value 20 Index Fund is unavailable as it is a brand new scheme.
Unlike some actively managed value-oriented schemes, the above-mentioned funds won’t have any drag from holding cash. However, being anchored to a benchmark does constrain their investment universe.
Any value-oriented investment strategy will test the patience of investors; investment horizons of more than five years are ideal.
Investors with a moderate to high risk appetite can consider the value-investing strategy.
Through passive value plays, you can buy ignored or unsought stocks believed to be trading at less than their assessed value. But you require to give these stocks adequate time to bounce back to their real worth.
In the case of ETFs, liquidity is an important factor to consider. Else, investors can go for the index fund, which enables SIP-purchasing.
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