Should First Time Investors Go for a 500-Stock Mutual Fund for Investment?
While new investors entering the stock market often face difficulty in choosing the right investment, diversified equity mutual funds are the best starting point as recommended by experts. It’s useful to diversify risk and balance returns over time; it would be helpful to first-time investors who are far more comforted by safe investments such as fixed deposits or small savings schemes. Is a mutual fund holding 500 different stocks appropriate for first-time investors?
India’s largest asset management firm, SBI Mutual Fund, recently launched the SBI Nifty 500 Index Fund. The fund comprises the top 500 stocks by size and includes large-cap, mid-cap and small-cap companies. It is not an innovative concept in India’s mutual funds space, though. The Motilal Oswal Nifty 500 Index Fund came out five years ago, while the Axis Nifty 500 Index Fund entered the market just a couple of months back.
What does the fund provide?
The Nifty 500 Index reflects about 92% of India’s stock market and captures 21 sectors. This diversified index will have large, mid-sized companies and smaller ones in the sectors of oil and gas, IT, automobiles, financial services and consumer goods. The largest companies in the index include HDFC Bank, Reliance Industries, ICICI Bank, Infosys and ITC.
Motilal Oswal Nifty 500 Index Fund has reflected good returns in the last few years. Over one year, it had returned 35.29%, three years ago, the return was 16.73% and five years back, the return was 21.84%. Its return is better compared to various similar funds such as Nifty 100 TRI and Nifty 50 TRI. The fund invested 74.5% in large-cap stocks, 16.6% in mid-cap stocks and 8.9% in small-cap stocks.
Why Nifty 500 Index Fund?
The Nifty 500 Index Fund houses stocks of different sectors such as financial services, healthcare, technology and consumer goods, among many others. Therefore, if one sector performs badly, other sectors may do well, thus reducing the risk in a portfolio. The impact of a single stock or sector going bad is also reduced since investment is spread across companies of various sizes and different industries.
What Are the Cons?
While the Nifty 500 encompasses 500 companies, more importance is given to large-cap firms. This helps little for mid-cap and small-cap stocks, and thus, the fund may not be as diversified as you might have hoped. The fund is also overweight in sectors like financial services, IT, and energy. When these sectors see a downturn, all hell may break loose for the entire index.
Suitable for First-Time Investors?
Experts feel that broad-based index funds like the Nifty 500 might be a nice option for first-time investors. Since it houses thousands of stocks, market downturns would be less intense.
Yet, most affluent investors prefer to invest in passive funds such as these. This is also due to the reason that a first-time investor might require an active multi-cap fund, wherein a professional fund manager handpicks the best-performing stocks in the market. These funds are likely to fetch better returns through small regular investments, especially when the SIP is started with a minimal amount of money.
Whether to go for a passive or an active fund depends entirely upon personal goals, how much risk the investor wants to take, and whether they mind paying fees. The Nifty 500 Index Fund exposes you to the broadest possible universe, but its exposure to large companies and specific sectors can make it suspicious of market volatility.
