Cost of mimicking NIFTY?

S&P 500 has as the name suggest 500 stocks. It makes it pretty difficult for a retail investor to create a portfolio, unless they have 10s of millions of dollars. As a result, investors have gone via ETF route to help them replicate the returns of the index. The market is quite efficient and the cost involved is also low (management fee of 4-20 basis points) compared to what is charged by mutual funds in India.
In India, if I invested the 15 Lakhs in Nifty, I could replicate the portfolio within 2.5% error (the cost of the management fees). Added advantage being that I get NIFTY total returns (benefit of dividends, stock repurchase, rights, one time offers etc.) which is not shown by fund managers when they show the fund performance against the benchmark. I am surprised why not many individuals are still going through mutual funds & not direct.
There are 100s of papers pointing to the fact that “In an efficient market, portfolio managers cannot beat the market (once compensated for the management fees)”. If you also subscribe to this theory, the chart below from the 10th July closing price might give you some tips. Please note this was constructed when market was at an all-time high. If a 10% correction happens, your money can buy you more stocks and help reduce tracking error further.

Sector Stock Name Weightage (%) in index Share price no of shares Actual investment Portfolio weightage
ALUMINIUM Hindalco Industries Ltd. 0.77 3726.05 3 11,178 0.75
AUTO ANCILLARIES Bosch Ltd. 0.59 662.85 13 8,617 0.58
AUTOMOBILES – 2 AND 3 WHEELERS Bajaj Auto Ltd. 1.05 2731.9 6 16,391 1.10
Hero MotoCorp Ltd. 1.33 1673 12 20,076 1.34
AUTOMOBILES – 4 WHEELERS Eicher Motors Ltd. 1 28039.9 1 28,040 1.88
Mahindra & Mahindra Ltd. 1.75 1366.5 19 25,964 1.74
Maruti Suzuki India Ltd. 2.67 7440 5 37,200 2.49
Tata Motors Ltd DVR 0.37 268.25 21 5,633 0.38
Tata Motors Ltd. 2.26 83.5 406 33,901 2.27
BANKS Axis Bank Ltd. 2.45 510.5 72 36,756 2.46
Bank of Baroda 0.42 166.5 38 6,327 0.42
HDFC Bank Ltd. 9.3 1639.95 85 139,396 9.32
ICICI Bank Ltd. 5.17 1070.4 72 77,069 5.15
IndusInd Bank Ltd. 2.06 383.6 81 31,072 2.08
Kotak Mahindra Bank Ltd. 3.23 963.35 50 48,168 3.22
State Bank of India 2.82 285.25 148 42,217 2.82
Yes Bank Ltd. 1.49 1511.2 15 22,668 1.52
CEMENT AND CEMENT PRODUCTS ACC Ltd. 0.37 1629 3 4,887 0.33
Ambuja Cements Ltd. 0.5 254.25 30 7,628 0.51
UltraTech Cement Ltd. 1.15 4145 4 16,580 1.11
CIGARETTES I T C Ltd. 7.65 291.65 394 114,910 7.69
COMPUTERS – SOFTWARE HCL Technologies Ltd. 1.35 849.5 24 20,388 1.36
Infosys Ltd. 5.19 332.9 234 77,899 5.21
Tata Consultancy Services Ltd. 3.49 447.7 117 52,381 3.50
Tech Mahindra Ltd. 0.66 383.8 26 9,979 0.67
Wipro Ltd. 0.91 268.5 51 13,694 0.92
DIVERSIFIED Hindustan Unilever Ltd. 2.14 196 164 32,144 2.15
ENGINEERING Larsen & Toubro Ltd. 3.85 1734.5 33 57,239 3.83
FINANCE – HOUSING Housing Development Finance Corporation Ltd. 7.13 1097 98 107,506 7.19
Indiabulls Housing Finance Ltd. 0.96 1560.75 9 14,047 0.94
GAS GAIL (India) Ltd. 0.65 364.4 27 9,839 0.66
MEDIA & ENTERTAINMENT Zee Entertainment Enterprises Ltd. 0.75 504.3 22 11,095 0.74
MINING Coal India Ltd. 0.88 258.55 51 13,186 0.88
Vedanta Ltd. 1.29 260.75 74 19,296 1.29
OIL EXPLORATION/PRODUCTION Oil & Natural Gas Corporation Ltd. 1.23 161.85 114 18,451 1.23
PAINTS Asian Paints Ltd. 1.38 1126.8 18 20,282 1.36
PHARMACEUTICALS Aurobindo Pharma Ltd. 0.53 711 11 7,821 0.52
Cipla Ltd. 0.78 548.75 21 11,524 0.77
Dr. Reddy’s Laboratories Ltd. 0.9 2725 5 13,625 0.91
Lupin Ltd. 0.7 1148.5 9 10,337 0.69
Sun Pharmaceutical Industries Ltd. 1.7 563 45 25,335 1.69
POWER NTPC Ltd. 1.09 160.1 102 16,330 1.09
Power Grid Corporation of India Ltd. 1.29 211.65 91 19,260 1.29
Tata Power Co. Ltd. 0.41 558.85 11 6,147 0.41
REFINERIES Bharat Petroleum Corporation Ltd. 0.92 404.5 34 13,753 0.92
Indian Oil Corporation Ltd. 1.09 955.3 17 16,240 1.09
Reliance Industries Ltd. 6.36 1489.55 64 95,331 6.38
SHIPPING Adani Ports and Special Economic Zone Ltd. 0.81 375 32 12,000 0.80
STEEL AND STEEL PRODUCTS Tata Steel Ltd. 1.02 2432.1 6 14,593 0.98
TELECOMMUNICATION – EQUIPMENT Bharti Infratel Ltd. 0.73 23832.05
TELECOMMUNICATION – SERVICES Bharti Airtel Ltd. 1.39 408.8 51 20,849 1.39
Grand Total 99.98 104914.05 3,039 1,495,244 100.00

The reason for this 2% error: Bharti Infratel (not a fancy stock but still has a high stock price) making it hard to incorporate in the portfolio. Also Tata Motors & Tata Motor DVR are two separate scripts. If you choose one of the two, your tracking error can be further reduced.

If you plan to replicate this strategy, I would advise that systematic monthly investment would be more sound that one shot (bullet) investment. NSE categorizes stocks in 23 categories. However if you are starting with a monthly plan, get the basics sectors right in the first 6 month (Banking 24%, O&G 15%, Technology 14%, Auto 11% & Tobacco 5.8%) then start adding the minor industries over the next 12 months. Second year onwards diversify in the main industries and gain exposure in the second & third weights of the main industries. Like that if you systematically buy exposure in 1-2 companies every month, you can reduce your tracking error & yet able to mimic the stock index returns within a 2% range. A ghost trading in which you track your portfolio performance to a SIP on your favorite mutual fund or Index might give you a nice bearing on the efficacy of your strategy.

Please note I am a passive investor. I trade only 1-2 times in a quarter. This strategy will involve trading one day in a month to rebalance.

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