Your Questions Answered: I want to invest in mutual funds tracking Nifty 100 Index. Please elaborate on pros and cons

Q. I am a marine engineer working with a PSU in Maharashtra. My wife is a beautician running her own beauty parlour. We have been investing in ELSS mutual funds for the past 7 years. We want to diversify and invest in non-ELSS mutual funds. We would prefer investing in the large-cap sector through the index mutual funds route. Many of our acquaintances have suggested investing in mutual funds tracking the Nifty 100 Index. Can you please elaborate on the pros and cons of investing in mutual funds tracking the Nifty 100 Index?

Tanhaji Satam, Navi Mumbai, Maharashtra

The Nifty 100 Index is a broad-based benchmark that captures the performance of the top 100 blue-chip companies listed on the National Stock Exchange (NSE) of India, representing various sectors of the Indian economy. It is designed to reflect the behaviour and performance of large-cap companies and serves as a barometer for market movements.

The index is diversified, encompassing major sectors such as financial services, IT, consumer goods, energy, and healthcare, among others. This diversification makes the Nifty 100 a reliable indicator of the Indian market’s overall performance.

The index is calculated using the free float market capitalisation-weighted method, which means that only the shares readily available in the market for trading are considered for calculating the index. This methodology ensures that the index truly reflects the market conditions and the economic impact of the constituent companies.

Eligibility criterion of the Nifty 100 Index

Understanding the eligibility criteria for inclusion in the Nifty 100 Index is crucial as it directly impacts the composition and performance of the index.

• Market capitalisation ranking: The primary criterion for a company to be eligible for inclusion in the Nifty 100 Index is its ranking based on market capitalisation. The company must be part of the broader Nifty 500 index. From there, securities are included if their rank based on full market capitalisation is among the top 90.
• Trading frequency: The trading frequency of a company’s stock is also a vital factor. The company should have a trading frequency of 100% during the previous six months. This ensures that only those companies with consistent trading activity and liquidity are considered for inclusion in the index.
• Free-float market capitalisation: Another important aspect is the average free-floating market capitalisation, which should be at least 1.5 times higher than the smallest constituent in the index. This criterion ensures that the companies included in the index have a significant presence and impact on the market. Companies with Differential Voting Rights (DVR) shares are also eligible for the index.

The Nifty 100 Index is subject to periodic review and rebalancing to ensure that it accurately reflects the current market conditions. This process may result in the addition or removal of companies based on the eligibility criteria mentioned above.

Top constituents of the Nifty 100 Index

Let’s dive into the top 10 titans that dominate this index, shedding light on their market influence and sectoral impact.

• HDFC Bank: Standing as one of the leading private sector banks, HDFC Bank is known for its robust performance, a wide array of financial products, and a strong emphasis on technology and sustainability.
• Reliance Industries Ltd (RIL): As a conglomerate, RIL has a massive footprint across various sectors including telecommunications, retail, and energy. Its innovative strides in Jio platforms have revolutionised the digital space in India.
• ICICI Bank: This financial institution is a key player in banking and financial services, offering a variety of banking products and financial services to corporate and retail customers.
• Infosys: Another IT giant, Infosys is renowned for its consulting, technology, and outsourcing solutions. The company has been instrumental in driving innovation and excellence in the software services industry.
• ITC Ltd (ITC): ITC’s diversified presence across industries such as FMCG, hotels, paperboards, packaging, agri-business, and information technology underscores its role as a multi-business conglomerate.
• Bharti Airtel Ltd: Airtel is one of India’s largest telecommunications companies. It is also one of the most profitable telecom operators in India. Airtel has a presence in mobile telecommunication, broadband internet, etc.
• Tata Consultancy Services (TCS): A global leader in IT services, consulting, and business solutions, TCS has a strong presence across the globe, with a reputation for pioneering IT trends and contributing significantly to the sector’s growth.
• Larsen & Toubro Ltd (L&T): L&T is one of the largest companies in the heavy engineering and infrastructure space. L&T was founded in 1938 by two Danish engineers in Mumbai.
• Axis Bank Ltd: With a diverse suite of financial services, from banking and insurance to wealth management, Axis Bank is a name synonymous with innovation and customer-centricity.
• State Bank of India (SBI): This is the largest bank in India in terms of number of retail customers. It also has the largest branch network in India.

These companies not only lead the market in their respective sectors but also contribute significantly to the Nifty 100 index’s performance. The index’s methodology, based on free-float market capitalisation, ensures that the movements in these stocks are accurately reflected in the index’s performance.

Performance and returns and comparison with Nifty 50

As of September 30, 2024, the Nifty 100 Index has given a one-year total return of 38.84%. It has given a 5 year compounded total return of 19.59%. On the other hand, as of September 30, 2024, the Nifty 50 Index has given a one-year annual total return of 33.00%. It has given a 5 year compounded annual total return of 18.98%.

Note: Past performance is not an indication of future returns.

Pros and cons of investing In index mutual funds tracking Nifty 100 Index

Pros

Mutual funds that track indices like the Nifty 100 have become increasingly popular. These funds offer a passive investment strategy, aiming to replicate the performance of the Nifty 100 index, which represents the top 100 companies by market capitalisation listed on the NSE. Here, we delve into the advantages of investing in a mutual fund tracking the Nifty 100 index.

• Diversification: One of the primary benefits of investing in a mutual fund tracking the Nifty 100 index is diversification. By investing in a single fund, investors gain exposure to a basket of 100 companies, spreading their risk across various sectors and reducing the impact of poor performance by individual stocks.
• Cost efficiency: Index funds are known for their low expense ratios compared to actively managed funds. This is because they are passively managed, with the fund manager’s role primarily involving the replication of the index’s composition, thus incurring lower transaction costs and management fees.
• Transparency: Investors in Nifty 100 index funds benefit from the transparency of knowing exactly which stocks they are invested in and in what proportion. The index composition is publicly available, allowing investors to make informed decisions based on their understanding of the market.
• Performance consistency: While actively managed funds can sometimes outperform the market, they can also underperform. Index funds tracking the Nifty 100 offer the advantage of performance consistency, closely mirroring the returns of the index itself, which is often seen as a benchmark for the overall market performance.
• Ease of investment: For new investors or those who prefer a hands-off approach, index funds provide an easy way to invest in the stock market. There’s no need to research individual stocks or time the market, as the investment strategy is straightforward—track the index.
• Suitability for long-term goals: Index funds are generally well-suited for long-term investment goals. The Nifty 100 index encompasses a broad range of companies, including both well-established firms and those with growth potential, making it a suitable vehicle for investors with a long-term horizon.

Cons

• Market-cap bias: The Nifty 100 Index is weighted by market capitalisation, which means that the largest companies have a more significant impact on the index’s performance. This can lead to a concentration risk where the index is heavily influenced by the performance of a few large-cap stocks, potentially overshadowing the contribution of smaller companies and reducing the benefits of diversification.
• Disproportionate sector exposure: The Nifty 100 Index may exhibit a sectoral imbalance, with certain industries having a disproportionate weight. This can expose investors to sector-specific risks and volatility, which might not align with their investment goals or risk appetite.

Taxation

The landscape of mutual fund taxation in India has undergone significant changes with the introduction of Budget 2024. Investors who have their stakes in index mutual funds, especially those tracking the Nifty 100 index, need to be aware of the new tax implications that could affect their investment returns.

Taxation of index mutual funds pre-budget 2024

Before delving into the changes introduced by Budget 2024, it’s essential to understand the previous tax structure. Index funds tracking indices like the Nifty 100 are considered equity mutual funds and were taxed accordingly. Long-term capital gains (LTCG) on equity mutual funds were taxed at 10% if the gains exceeded ₹1 lakh in a financial year. Short-term capital gains (STCG), on the other hand, were taxed at 15% if the units were sold within a year of purchase

Key changes introduced by Budget 2024

Budget 2024 has brought about several adjustments to the taxation of mutual funds. Gains over ₹1.25 lakh are taxed at a rate of 12.5%. If the mutual fund units are sold within one year from the date of investment, the entire amount of gain is taxed at the rate of 20%. It’s important to note that no tax is to be paid as long as the units are held.

Conclusion

The Nifty 100 Index is a vital tool for investors, traders, and market analysts. It provides a snapshot of the market’s health and the economic strength of India’s top companies. With its comprehensive coverage and robust methodology, the Nifty 100 continues to be a key index for gauging the pulse of the Indian equity market.

Constituents of Nifty 100 index are not just market leaders but also trailblazers shaping the future of their respective industries. Their performance is a testament to the robustness of the Indian market and its potential for growth and innovation. As the market evolves, these companies are likely to continue playing a significant role in driving India’s economic engine forward.

Additionally, the changes introduced by Budget 2024 have significant implications for investors in index mutual funds. It’s imperative for investors to stay informed about these changes and consider their impact on investment strategies.

Kuvera is a free direct mutual fund investing platform. Unless otherwise stated data sourced from BSE, NSE and kuvera.