After a near 5 per cent fall last Thursday, domestic markets recovered to an extent on Friday. While no one can say for sure that markets may head in one direction or the other going forward, volatility arising from macro-economic and geo-political events can provide opportunities for investors. The bellwether Nifty50 index is down almost 10 per cent now from its October 2021 peak and almost 4 per cent down year-to-date (YTD). Cuts have been deeper across the mid and small-cap indices, with the YTD fall ranging from 8 to 16 per cent, while the broader Nifty 500 index has been holding up better, with a 5.2 per cent YTD fall. Of course, several constituents of all major indices have seen sharper drop. Almost half (240 stocks) of the Nifty 500 stocks have seen at least a double-digit dip YTD with 75 stocks correcting over 20 per cent. Needless to say, most of these are from the mid and small-cap space, with some exceptions from the technology space such as L&T Infotech, Tech Mahindra, Wipro and Mindtree. Some of these tech stocks are among the top losers in the Nifty50 too, during this period. The modest losses posted by higher weighted stocks such as Reliance Industries, HDFC Bank and ICICI Bank helped the bellwether contain losses better.

Net-net, the volatility has opened up opportunities across market capitalisation segments for savvier investors, who can look to buy quality companies at cheaper valuations. However, the downside here is that stocks can fall far more than indices and the bottom is known only in hindsight.

For those who do not have the risk appetite for direct stock investing and are looking for safer avenues, across-the-board corrections make index investing a relatively lower risk option for equity investors. Index funds don’t need a demat account; SIP investments too are allowed here. Investors hence can follow one of the two strategies at this juncture - if you have a lumpsum, invest in the index in few tranches, taking advantage of further volatility or fall in the days to come; else, those with a horizon of at least 7 years can consider SIP investments.

That said, what is the best option for index investing today? Investors can choose from among funds mirroring the Nifty50, Sensex or Nifty 100 indices at this point. As pointed out in our Big Story titled ‘ How to choose index funds’ in the edition dated February 20, a 10-year daily rolling return analysis of these indices over the last one- , three- five- and seven year periods throws out similar average returns (CAGR) for these three indices. To illustrate, on a five- year rolling return basis, all three indices clocked 11.1-11.7 per cent average returns as of February 25. On a point-to-point return basis too, the Nifty50, Nifty 100 and the Sensex show somewhat similar returns (CAGR) over three-, five and ten-year periods.

UTI /ICICI Pru Nifty Index Fund, HDFC Index Fund – Nifty 50 / Sensex Plan are some of the funds that investors can consider, based on low tracking error, low expense ratios (regular plan), reasonable corpus size of the fund as well as long track record. Nippon India Index Fund – Nifty / Sensex and SBI Nifty Index fund are other options under direct plans.

The Nifty Next 50 and Nifty 500 indices are other choices. The Nifty 500 has somewhat similar top 5 sector allocation with similar weights assigned to each of these sectors as the Nifty 50 and the Nifty 100, although the broader index has a long tail. The top constituents in the Nifty 500 too are similar to the large-cap indices. However, it shows higher volatility across short and long time periods (measured in terms of standard deviation ) to bring out the same level of returns as its large-cap counterparts. The Nifty Next 50, with weights much different from the Nifty 50 and Nifty 100 for both sectors and top stocks, shows better returns than the bellwethers or the Nifty 100, but is marked by higher volatility too.

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