August 18, 2025
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DSP Mutual Fund is launching India’s first passive Flexicap Index Fund – DSP Nifty500 Flexicap Quality 30 Index Fund. SahiFund.com had the opportunity of having an in-depth conversation with Mr. Anil Ghelani, Head- Passive Investments & Product , DSP Mutual Fund on the new launch, myths related passive mutual funds and much more…
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Differentiation and Strategy
The Nifty500 Flexicap Quality 30 Index approach is relatively new in the Indian passive investing space.
How does this strategy differ from traditional Nifty or Nifty Next 50 passive funds in terms of stock selection, sector exposure, and volatility profile, and why do you think it can outperform over the long term?Sub question:
- Can you share an example where the quality filter would have avoided a stock in the main Nifty?
As passive investing evolves in India, the need for a compelling alternative to traditional beta or broad market indices like the Nifty 50 and Nifty Next 50 was needed. This new index is a first-of-its-kind, low-cost flexicap strategy that combines quality-only stocks and dynamic market cap allocation based on momentum triggers. This fund will mirror India’s first flexicap index, designed to help investors navigate shifting equity markets confidently. The new fund addresses the most common challenges faced by equity investors: identifying high quality stocks, automating optimal allocation to large, mid and small caps and doing all this at a low cost. Unlike conventional indices that rely solely on market capitalization, this strategy selects 30 stocks based on fundamental strength, drawing from large, mid, and small cap quality indices. The selection is guided by metrics such as high return on equity, low debt-to-equity ratio, and consistent earnings growth. This results in a portfolio that is equally weighted and sector-balanced, with notable allocations to IT (30%), Financials (24%), and FMCG (17%) as of June 2025. What makes this index particularly dynamic is its momentum-based allocation model. Depending on market trends, it shifts exposure between large caps and SMID (small and mid caps), allowing it to adapt to different phases of the market cycle. For instance, when SMID stocks outperform, they receive up to 67% of the portfolio weight, and vice versa.
Performance-wise, the index has delivered a CAGR of ~ 18.1% since its inception in 2009, outperforming the Nifty 500 TRI’s ~ 13%. In rolling 5-year SIPs, it beat the Nifty 500 in 88% of instances, with higher median returns (20.3% vs. 15.8%).
One of the most powerful aspects of this strategy is its ability to avoid risky stocks through its quality filters. A notable example is Yes Bank, which was once part of the Nifty 50. Despite its market cap, a declining ROE, rising debt, and negative earnings growth would have excluded it from the Nifty500 Flexicap Quality 30 Index.
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Quality Factor in Indian Context
The “quality” factor often works well globally, but India’s market cycles and sector dominance patterns can be unique. What specific adjustments or interpretations of the quality factor do you think work best in the Indian equity landscape?
Sub question
- Do you see quality being dominated by certain sectors in India?
- How does the quality factor handle emerging companies with short operating histories?
Whether in India or any other country, if you ask anyone about basic rules of selecting stocks, you will get a suggestion to buy companies with a good business model, strong capital structure and a track record of riding across business cycles. This is nothing but “Quality” factor in simple terms. Socks selected using quality factor are more fundamentally strong, having a strong balance sheet, financial stability and consistent profitability track record. Often newly emerging companies or business models which are currently making losses, or having a cyclically volatile profit profile or very highly leveraged balance sheets will get weeded out when using quality filters. So we get a list of companies which typically have a durable business model and could be relatively less prone to financial distress across market cycles. Hence quality factor works well in India as well as other global markets – and the data of various quality tilted indices will show that. However, just like any other driver of risk and returns, quality also has cycles. Very often during very sharply rising bull markets, quality stocks show relatively lower performance because investors feel they will make good returns even in lower quality companies. So quality often under performs when the market as a whole is experiencing strong positive returns. Conversely, the quality factor tends to do well during economic downturns and market turbulence.
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Role in Investor Portfolios
For retail investors already holding diversified index funds or ETFs, where does the Nifty500 Flexicap Quality 30 Index Fund fit in? Is it best suited as a core holding, a satellite tactical bet, or a volatility-reducer in their portfolio?
Sub questions
- Could it replace part of a large-cap allocation or complement it?
- Is there a role for this fund in retirement-focused portfolios?
- How would you size this allocation for a conservative investor vs an aggressive one?
With its focus on high-quality companies across large, mid, and small caps, this index can play multiple roles depending on the investor’s goals and risk appetite. For most investors, the fund is best positioned as a satellite holding, some sort of a tactical allocation that complements a core portfolio of broad-based index funds. Its quality tilt and equal-weight structure help reduce concentration risk and smooth out performance during market downturns. However, for those seeking a more defensive equity exposure, it could also serve as a volatility-reducer or even a partial replacement for large-cap allocations, especially in portfolios heavily tilted toward the Nifty 50. Its historical performance shows lower drawdowns and more consistent returns, which are valuable traits for retirees or conservative investors who prioritize capital preservation and income stability. When it comes to sizing the allocation, a conservative investor might consider a 5–10% exposure, using it to temper volatility and add quality to their equity sleeve. An aggressive investor, on the other hand, could go up to 15–20%, leveraging the fund’s dynamic allocation and quality bias to enhance long-term returns without taking on excessive risk. In summary, this index can be a versatile tool in the retail investor’s kit—one that can complement, enhance, or stabilize a portfolio depending on how it’s used.
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Passive but Not Plain Vanilla
While passive funds track an index, index design choices (like rebalancing frequency, factor definition) can significantly influence returns. What goes on behind the scenes in maintaining such a specialized index, and how does DSP ensure smooth tracking and minimal slippage?
Sub questions
- What tracking error range do you expect?
Maintenance of an index is a very specialised activity and it is done only by the index providers. They have a robust process of collecting and monitoring data and they maintain the indices in public domain while following requisite standards of transparency. We at DSP as an asset management company, launch ETFs or Index Funds on such publicly available indices and focus on managing our portfolios which can provide risk and return outcomes similar to the underlying index. At DSP, we have a dedicated investment management team only for ETFs and Index Funds, separate from the team that manages active funds. We are constantly working towards reducing the tracking error and tracking difference. On a daily basis we closely track all capital flows and then we split our trades into parts with an endeavor to deploy funds efficiently and reduce idle cash as much as possible. During the periodic rebalance trades at the end of each quarter, we carefully plan and execute all rebalances with an aim to ensure minimal deviation.
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Managing Investor Expectations
Many investors chase the best 1–2 year performers without understanding factor cycles.
What would you say to an investor entering this fund about return expectations, patience needed, and the right holding period for a factor-based passive product?Sub question
- Could combining quality with another factor (e.g., momentum) help smooth returns?
Yes you are right – often investors look at strong performance in the recent past. At DSP, we prefer to launch new funds when weak performance phases are behind us or when future prospects look attractive. The Nifty500 Flexicap Quality 30 Index has underperformed Nifty 500 TRI in the last 3 years and the extent of current underperformance is the highest since inception. This is primarily driven by weak performance of quality factor and broad-based rally (which worked against concentration) in the last few years. Recently we have seen signs of turnaround in the performance of Quality stocks, which could be beneficial for this index. The Nifty500 Flexicap Quality 30 Index is designed for patient, disciplined, long-term capital rather than short-term flows. For investors looking at this index, we are recommending to consider SIPs instead of any lumpsum amounts. At current market valuation levels, we believe it would be prudent if you are investing smaller amounts over a long time frame. When prices fall, you can get to accumulate more units at cheaper prices.
The point about combining multiple factors is very powerful. Even the Nifty500 Flexicap Quality 30 Index has a combination of quality with Momentum and Concentration. The allocation of between large, mid and small caps is done on the basis of relative momentum. Once selected, within each bucket there are only 10 stocks – so the total portfolio of only 30 stocks brings concentration to the portfolio.
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. Future of Passive Factor Investing in India
Globally, factor-based passive funds (quality, value, momentum) have gained big traction.
Do you believe India is at the inflection point for smart-beta ETFs and index funds, and what role will investor education play in driving adoption over the next 3–5 years?Sub question
- Which factor do you see gaining traction next in India?
- Is DSP planning more smart-beta launches?
- What’s the single biggest myth about passive factor investing you’d like to bust?
Globally, smart-beta ETFs—those built on factors like quality, value, and momentum—have reshaped passive investing. In India, this evolution is now gaining momentum. With assets in smart-beta funds tripling in just a year, the market seems poised for a breakout.
Unlike traditional index funds that track market cap-weighted benchmarks, smart-beta funds follow custom indices based on investment factors. These include profitability (quality), undervaluation (value), and trend-following (momentum). The result: a passive strategy with active-like precision. But adoption won’t happen overnight and investor education will be key. Many still believe passive means “set and forget,” but factor-based investing requires understanding cycles, patience, and discipline. These strategies don’t outperform every year—but over time, they can deliver superior risk-adjusted returns.
After quality, low volatility and momentum are strong contenders. Momentum captures short-term winners, while low volatility appeals to risk-averse investors.
Back in 2017 when we at DSP started our passive investments platform, we did not start with Nifty 50, but we launched a smart beta fund by being the first fund house in India to use equal weight strategy on the Nifty 50 Index. We constantly focus on various ideas and yes we surely expect to launch more factor based, smart beta ETFs and Index Funds in the future as well.
Biggest myth to bust is that passive investing is too simple to be effective. Many investors assume that because passive investing is rules-based and low-cost, it must also be low-return. But factor-based passive strategies are anything but basic. Smart-beta funds use sophisticated index design—selecting stocks based on traits like quality, momentum, or value. These traits have historically delivered strong long-term outperformance, often beating traditional market-cap indices. So the myth isn’t just that passive is “simple”—it’s the assumption that simplicity equals limited potential. In reality, smart-beta is strategic: it’s passive in execution, but active in design.