A passive Nifty investment strategy to beat market returns

Synopsis

If the gains in Nifty are driven by a select set of stocks, investors could consider the Top 10 Equal Weight index, while investing in the Nifty 50 Equal Weight index is suitable in times of a broad-based rally, says Anil Ghelani, head of passive investments and products, DSP Mutual Fund.

Mumbai: A low-cost investment strategy that aims to benefit from both narrow and broad-based equity rallies could generate market-beating returns. The plan, better suited for seasoned investors, involves switching between two Nifty index funds -- Nifty Top 10 Equal Weight, and Nifty 50 Equal Weight -- depending on market conditions.

If the gains in Nifty are driven by a select set of stocks, investors could consider the Top 10 Equal Weight index, while investing in the Nifty 50 Equal Weight index is suitable in times of a broad-based rally, says Anil Ghelani, head of passive investments and products, DSP Mutual Fund.

A study by DSP Mutual fund showed investors can benefit from phases of 'polarisation' and 'depolarisation' by adopting a simple strategy of buying these index funds.

When the rally is narrow, with the top 10 stocks of the Nifty 50 starting to outperform the remaining 40 stocks of the Nifty 50, it is considered a polarised market. On the other hand, when the top 10 stocks underperform the remaining 40 stocks in the Nifty 50 Index, the phase is termed depolarisation.

This strategy could make higher returns than merely investing in a single index. DSP's study showed investors, who followed this strategy could have generated returns of 14.6% every year over the February 2007 - April 2025 period. In comparison, investments in the Nifty 50 Equal Weight Total Returns Index (TRI) alone would have returned 12.9% every year, while it would be 13.3% for the Nifty Top 10 Equal Weight TRI, and 12.2% for the Nifty 50 TRI.

"If you are able to tactically time the entry into these funds, there is scope for outperformance in such passive index strategies," says Prateek Sinha, director, Deep MFD, a wealth management firm.

DSP said the Nifty has entered a polarisation phase beginning November 2024, where the top 10 stocks are outperforming the broader markets, and investors would be better off investing in the Top 10 Equal Weight Index. During the 15 months between September 2023 and November 2024, the market had been in a depolarisation phase.

For deciding their entry points into each of these indices, investors must track the ratio of the Top 10 Equal Weight Index to the 50 Equal Weight Index.

Whenever the ratio is above its 12-month moving average, it means that the Nifty Top 10 Equal Weight Index has started to outperform. When this ratio moves below the 12-month moving average, investors could consider the Nifty 50 Equal Weight Index.

Such investment strategies could work well for investors with sophisticated systems.

"Family offices or rich investors can use such strategies, where they monitor the changing trends and are quick to act," says S Shankar, certified financial planner at Credo Capital.

Sinha, of Deep MFD, said retail investors, especially those who do not track the market regularly, might find it difficult to capture such changing trends.