Buying the Nifty50 Still “Buying the Market”? Diversification?
Buying the Nifty50 Still “Buying the Market”? Diversification?
Many Indian investors equate owning a low-cost Nifty50 index fund with having broad market exposure. But how diversified is it-really?
As of mid-2025, the top 10 stocks in the Nifty50 account for over 62% of the total index weight.
Sector-wise, exposure is heavily skewed toward financial services (~37%), information technology (~17%), and energy (~12%).
In short, “buying the market” is increasingly a concentrated bet on a handful of large-cap sectors.
This isn’t necessarily the wrong approach but it’s not as diversified as it might appear on paper.
To counter this concentration, many investors turn to broader indices:
BSE200 and BSE500 (Nifty200/Nifty500)
• BSE200 covers ~85% of India’s market cap, with ~85–88% of its weight still in large-cap stocks.
• BSE500 covers ~93% of the market, offering exposure across 22 sectors. Yet, over 80% of its weight is still driven by large caps.
But Can You Diversify Too Much?
Yes-over-diversification is real, and often counterproductive.
Take the BSE1000, for instance. While it adds another 500 names beyond the BSE500, the bulk of returns are still driven by the top 200–300 companies. The long tail of micro- and small-cap stocks often suffer from:
• Low liquidity
• Limited research coverage
• Higher volatility
• Increased tracking error
Despite including 1,000 stocks, large caps still make up nearly 78–80% of the BSE1000. The marginal benefit of adding more constituents may not justify the drag on performance or the added complexity. It’s what many refer to as “diworsification” - where more isn’t necessarily better.
The Bottom Line
In 2024, nearly 70% of Nifty50 constituents underperformed the index, meaning a select few names drove the majority of returns. This mirrors global trends and calls into question the assumption that market-cap indices are truly “diversified.”
This isn’t necessarily the wrong approach but it’s not as diversified as it might appear on paper.
To counter this concentration, many investors turn to broader indices:
BSE200 and BSE500 (Nifty200/Nifty500)
• BSE200 covers ~85% of India’s market cap, with ~85–88% of its weight still in large-cap stocks.
• BSE500 covers ~93% of the market, offering exposure across 22 sectors. Yet, over 80% of its weight is still driven by large caps.
But Can You Diversify Too Much?
Yes-over-diversification is real, and often counterproductive.
Take the BSE1000, for instance. While it adds another 500 names beyond the BSE500, the bulk of returns are still driven by the top 200–300 companies. The long tail of micro- and small-cap stocks often suffer from:
• Low liquidity
• Limited research coverage
• Higher volatility
• Increased tracking error
Despite including 1,000 stocks, large caps still make up nearly 78–80% of the BSE1000. The marginal benefit of adding more constituents may not justify the drag on performance or the added complexity. It’s what many refer to as “diworsification” - where more isn’t necessarily better.
The Bottom Line
In 2024, nearly 70% of Nifty50 constituents underperformed the index, meaning a select few names drove the majority of returns. This mirrors global trends and calls into question the assumption that market-cap indices are truly “diversified.”
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