Mutual Funds: Do you need to invest in passive funds based on ‘Total Market Index’ having 750 stocks?

A majority of Indian investors who invest in passive funds, tend to go with the largecap passive fund options like Nifty50-based index funds. But the passive space now has a lot of options. In fact, a few too many to be honest. We have the well-known Nifty50 and popular Nifty Next50. 

Then there are others like Nifty100, LargeMidcap250, Midcap150, Smallcap index funds and several factors and sectoral/thematic funds. In fact, at the time of writing, we have more than 135+ schemes in the passive fund space!

But while most index funds tend to focus on one market segment (or sector or factor), there is one interesting option that tries to bet on everything. And it is rightly referred to as - Total Market Index Fund.

So what is this new index?

A while back, NSE launched a new index named ‘Nifty Total Market Index’ that aims to track the performance of the top-750 stocks by market capitalization. Having 750 stocks in one fund does seem a lot and definitely will give a high to advocates of diversification, but does it really help? We will see in a bit.

But first, let’s see what this 750-stock index will consist of. All the stocks that are part of Nifty500 and Nifty Microcap250, will find a place in the new index.

And since stocks from all market cap segments like large, mid, small and microcap get a representation via a single index, hence the name Total Market Index. If we drill down a bit more, here is what lies under the hood:

• 100 largecap stocks from Nifty 100 (or say Nifty50 + Next50)
• 150 midcap stocks from Nifty Midcap150
• Bottom 250 (smallcap) stocks that are part of Nifty500
• Stocks ranked 251 to 750 beyond Nifty500.

Till now, the closest thing to this new index was Nifty500. But while Nifty500 did a good job of providing proper representation to large, mid and small-cap stocks, it had no stocks from the Beyond-500 space of microcap stocks. So this Total Market Index (of 750 stocks) does address this gap. But does it really help diversify things or is it just an optical diversification (given a large number of stocks that are part of the index)?

The NSE fact sheet about the Total Market Index shows that it is highly correlated with the Nifty50. As per the data provided by NSE, the correlation stands at an extremely high 0.98 over a 5-year period and 0.95 for a 1-year period.

This means that more often than not, the return outcome of Nifty750 and that of Nifty50 might be similar.

And the primary reason for this is that the Total Market Index will also be constituted based on market cap-based weights. So the stocks of larger companies in the index will naturally get higher weights in the index.

So it is not that you are getting equal 25% exposure to all market caps like large/mid/small/micro-caps. The index will be heavily skewed towards the largecaps belonging to the top-100 segment. And the representation of smallcaps and more specifically microcaps (stocks beyond the top-500) will be extremely low, though not negligible.

This is the same reason why investing in Nifty100 is not the same as investing in Nifty50 and Next50 as I wrote about it here a while back.

So all said and done, do you as an investor looking to invest in passive funds, consider investing in Total Market Index Fund?

This is a new fund with a very small vintage. Hence chances are high that if you are a proponent of passive investing, you already have index funds that track Nifty50/Sensex and Nifty Next50 in your portfolio. So for you (and other similar investors) who already invest in largecap index funds (which cover the top 100 stocks), there isn’t exactly a need for the new total market index fund. Just getting into another index fund to take incrementally higher (but still very small) exposure to stocks from rank 101-750 won’t help much.

But if you have yet to invest in a passive fund, then this is definitely an option on the table.

However, even a Nifty500 index fund provides sufficient diversification to practically the entire usable stock universe in India. And even the structures are very similar. The Nifty500 Index fund has about 72% in largecaps, 17-18% in midcaps and 10-11% in smallcaps. Not surprisingly on the other hand, the Total Market Index with its monstrous portfolio of 750 stocks from the entire marketcap spectrum has 69% in largecaps, 16-17% in midcaps and 13-14% in smallcaps & microcaps.

You may also want to read about how to build a passive-only portfolio as a suggested related reading.

Disclaimer - The views expressed above should not be considered professional investment advice or advertisement or otherwise. No specific product/service recommendations have been made and the article itself is for general educational purposes only. The readers are requested to take into consideration all the risk factors including their financial condition, suitability to risk-return profile and the likes and take professional investment advice before investing.

Dev Ashish is a Sebi-registered investment adviser and the founder of Stable Investor.