Investors can participate in a value strategy through actively or passively managed funds. Active funds have professional managers who make decisions on portfolio allocation, aiming to outperform the market through research and analysis. On the other hand, passive investing is straightforward wherein the fund just follows the index it is based on, holding the same stocks in the same proportions. This means an investor is always aware of what one is investing into. Plus, the index generally tends to be diversified in nature and is low cost in nature compared to its active counterpart. Additionally, investors through index investing can have a hands-off approach to investing.
Now, for an investor looking to integrate value style in one’s portfolio, one of the easiest ways of achieving this objective is via investing in an offering based on the Nifty 50 Value 20 index.
Understanding Nifty 50 Value 20 Index
The Nifty 50 Value 20 Index comprises 20 companies from the Nifty 50 universe. These 20 companies are chosen for their value based on financial metrics such as price-to-earnings ratio, price-to-book ratio, return on capital employed (ROCE), and dividend yield (DY). The price-to-book ratio (PB) indicates how much a company is worth compared to its value on paper, showing if a stock is cheap or expensive. The price-to-earnings ratio (PE) shows how much an investor is paying for each rupee the company makes. A lower PB or PE ratio suggests undervaluation, making stocks potentially attractive to value investors.
Value companies are generally those companies with low PE, PB and high ROCE and DY. Ranks are assigned to individually of the 50 Nifty constituents based on each parameter. Relatively lower PE and PB receives a better rank, while higher DY and ROCE receive a better rank. Weights are assigned to each of these parameters, 40% ROCE, 30% PE, 20% PB, 10% DY, to derive the final ranking for selecting the 20 stocks which are going to be a part of the index. The weightage of each name in the index is capped at 15%.
As a means to keep up with the changing market conditions, the index is reviewed on an annual basis. The weightage of each name in the index is capped at 15%. This means that at the time of rebalancing of the index, no single constituent shall have a weightage of more than 15%.
Index Performance
As of May 31, 2024, the Nifty 50 Value 20 Index (TRI) has demonstrated robust performance, delivering healthy CAGR returns of 18.88% and 19.91% respectively over three years and five years respectively.
As a result, investing in this index is an attractive option for investors seeking value picks from the Nifty 50 universe without extensive research, thereby offering a simple, transparent, and cost-effective way to invest in value stocks. With its straightforward strategy, diversified portfolio, and solid track record, it is a great way to unlock the power of passive value investing and reach one’s long-term financial goals with relative ease.
(Chintan Haria is Principal – Investment Strategy at ICICI Prudential AMC.)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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