Large Cap Indices – Traditional Index or Smart Beta, which to choose?
A lot has been discussed about active versus passive mutual funds, and how to choose between their categories. With many active funds, especially large-cap ones, struggling to consistently outperform their benchmarks, investors are increasingly turning their attention to passive funds.
But did you know that within the passive large-cap space—the top 100 companies by market capitalization, as per the Securities and Exchange Board of India (SEBI)—there are multiple types of passive indices for investors to choose from?
On the traditional side, we have considered three indices: BSE Sensex, Nifty 50, and Nifty 100. On the smart beta side, there are eight options: Nifty 100 Alpha 30, Nifty 100 Low Volatility 30, Nifty 100 Quality 30, Nifty 100 Equal Weight, Nifty 50 Equal Weight, Nifty Next 50, Nifty 50 Value 20, and Nifty Top 10 Equal Weight.
It can get confusing, right? Should you choose the large-cap traditional indices or smart beta indices—or both? Each of these 11 large-cap indices follows unique strategies. Based on a 10-year daily rolling compound annual growth rate (CAGR) returns from 1 April 2015 to 30 August 2024, the average returns generated by the traditional large-cap indices have been 12-12.5%, with maximum returns ranging between 17.6-18.3% CAGR and minimum at 5.1-5.6%.
On the other hand, large-cap smart beta indices have delivered average returns of 11.4-15.9% CAGR, with maximum returns ranging from 16.3-24.3% and minimum returns between 2.7-9.4% CAGR. This clearly shows that large-cap smart beta indices have often outperformed their traditional counterparts.
While certain large-cap smart beta indices can be more volatile and exhibit cyclical behavior compared to traditional large-cap indices, they have
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