HDFC Nifty500 Multicap 50:25:25 Index Fund Review

HDFC Nifty500 Multicap 50:25:25 Index Fund is an open-ended scheme replicating/tracking Nifty500 Multicap 50:25:25 Index. We will discuss whether it makes sense to invest in this new fund.To aid active multi-cap funds in benchmarking themselves after SEBI changed their asset-allocation pattern, NSE launched the Nifty 500 Multicap 50:25:25 Index on Dec 2nd 2020.The index is a mixture of three indices: 50% of Nifty 100 plus 25% of Nifty Midcap 150 and 25% of Nifty Smallcap 250 TRI. The 500 stocks of the Nifty500 Multicap 50:25:25 Index would be identical to the Nifty 500, but the weights would be considerably different.Unlike the Nifty 500, which has more than 70% of large cap stocks (due to market capitalization-based weights), about 15-20% mid cap stocks and the rest, small cap stocks, the Nifty500 Multicap 50:25:25 index (as the name suggests) holds close to 50% large cap, 25% mid cap and 25% small cap stocks.We shall now proceed to compare the index movement with other prominent benchmarks.Nifty500 Multicap 50:25:25 TR vs Nifty 50 TRINifty500 Multicap 50-25-25 Total Return Index vs Nifty 50 TRI from April 2005 to August 2024Before we get carried away by the recent outperformance, it is important to recognise that the multicap index did not do too well for the first 6-7 years after inception, and it periodically keeps falling back down to Nifty 50.So, like any other new idea or strategy, do not expect the multicap index to beat the Nifty 50 all the time. Nothing will outperform all the time. Everything is cyclic with unknown periodicity. We can never know when something will start/stop outperforming!Nifty500 Multicap 50:25:25 TR vs Nifty Next 50 TRINifty500 Multicap 50-25-25 Total Return Index vs Nifty Next 50 TRI from April 2005 to August 2024The multicap index movement is quite close to that of NIfty Next 50 TRI (when viewed from 1st April 2005), except for occasional deviations. So, if you are already investing in a Nifty Next 50 index fund, you do not need a Nifty500 Multicap 50:25:25 Index Fund.These are indices that make up the multicap index.Nifty500 Multicap 50-25-25 Total Return Index vs Nifty Midcap 150 TRI vs Nifty Small Cap 250 TRI vs Nifty 100 TRI from April 2005 to August 2024Rolling returns of the multicap index (yellow) and Nifty 50 TRI (brown) are shown below for five and ten years. This means we look at every possible 5Y and 10Y return between April 1st, 2005, and August 23rd, 2024. The number of such data points in each coloured line is indicated within each image.Five-year rolling returns of Nifty500 Multicap 50-25-25 Total Return Index with Nifty 50 TRI between April 2005 to August 2024Ten-year rolling returns of Nifty500 Multicap 50-25-25 Total Return Index with Nifty 50 TRI between April 2005 to August 2024Over five years, the likelihood of the multicap index outperforming the Nifty 50 is a coin toss. Over ten years, the likelihood is higher.If we repeat the exercise with the Nifty Next 50, Nifty Midcap 150 and Nifty Smallcap 250, we see little difference between the multicap index and Nifty Next 50.Ten-year rolling returns of Nifty500 Multicap 50-25-25 TRI with Nifty Midcap 150 TRI, Nifty Smallcap 250 TRI and Nifty Next 50 TRIOnce again, the futility of investing in a small cap index is seen above. Also see: Nippon India Nifty Smallcap 250 Index Fund: Can I add this to my passive portfolio?Next, we compare the five and ten tear rolling risk or standard deviation of the multicap index with Nifty 50 and Nifty Next 50. The volatility of the hybrid index is similar to the Nifty 50 TR index.Ten-year rolling risk (standard deviation) of Nifty500 Multicap 50-25-25 TRI with Nifty 50 TRI and Nifty Next 50 TRI between April 2005 and August 2024In summary, the Nifty500 Multicap 50:25:25 Index has a risk profile close to the Nifty 50 and a reward profile close to the Nifty Next 50.  It makes no sense for existing Nifty or Nifty Next 50 investors to include HDFC Nifty500 Multicap 50:25:25 Index Fund in their portfolios.Can new investors use HDFC Nifty500 Multicap 50:25:25 Index Fund as a single fund to get exposure to all market caps? We do not recommend this. When mid and small-caps do not do well, the index will likely underperform Nifty 50. Such underperformance could last years. 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