26 Feb 2021

What companies are in Kuvera recommended portfolio?

What is a market-cap weighted index fund? Let’s say you are investing ₹1,000 in a typical Nifty 50 index fund. Where does your ₹1,000 go? It’s split between the shares of the 50 constituent companies in the index. But how much money is spent on each company? That’s determined by their market cap.

As I am writing this post, HDFC Bank takes up 10.29% of the index, Reliance Industries takes up 10.13%, and so on (source). In other words, ₹102.90 from your ₹1,000 is spent on HDFC Bank’s shares, ₹101.30 from your ₹1,000 is spent on buying Reliance Industries shares, and so on. Basically, you are buying 50 companies, but the larger each company is the more you spend on it.

Another way to think about this is to equally distribute the ₹1,000 to all 50 companies at ₹20 per company. Then, take a part of the money allocated to smaller companies and use it to buy more of the larger companies. This is a popular way of deciding how much money to put in each company. So popular, in fact, that this is the “default” way index funds allocate capital.

Mutual fund schemes recommended by Kuvera

I am a Kuvera customer, and I invest in the portfolio recommended by them. Kuvera recommends 3 funds for domestic equity and 1 fund for US equity. Let’s keep aside the US fund and focus on the 3 domestic funds. We have a market-cap weighted Nifty Next 50 index fund, an equal weight Nifty 50 index fund, and a focused fund. The focused fund states that it’ll allocate at least 65% of the money in companies chosen from the first 100 companies, i.e. constituents of the Nifty 50 and Nifty Next 50 indices (see screenshot below).

So, what does it mean to invest in the 3 funds recommended by Kuvera? It means you are mostly investing in the largest 100 companies in India.

  • You allocate more or less equal amount of money into each of the 50 companies in the Nifty 50 index (because this is an equal weight index fund).
  • You buy Nifty Next 50 companies according to their market cap, but the Next 50 index has a much less concentrated portfolio than the Nifty 50 index. The largest weight in this index is 4.45% (compared to 10.3% in the Nifty 50). So your money is a bit more evenly spread across the 50 constituents.
  • Now you add the focused fund. That increases your exposure to a subset of these 100 companies according to the fund managers’ judgement. It can also add exposure to companies beyond the first 100 companies, but that would be a maximum of 10% of your equity portfolio (28.5% is allocated to the focused fund; the focused fund can allocate up to 35% in companies outside the Nifty 100 index).

After having invested in this portfolio for a year, I think I understand what companies I am investing in. I still haven’t figured out the ratios: why 45.7% in Nifty Next 50, why 28.5% in the focused fund, etc. Hopefully I’ll understand that in some time.

No comments:

Post a Comment