NSE's Backtesting Claims Child Indices Beat Parent Indices – But Does It Hold in the Real World? 09Dec2025
(The views expressed here are for information purposes only and should not be construed as a recommendation or investment advice. While the author is a CFA Charterholder with nearly 25 years of experience in financial markets, this content is intended to share general insights and does not constitute financial guidance. Please consult your financial adviser before taking any investment decision. Safe to assume the author has a vested interest in stocks / investments discussed if any.)
1 Investor Interest in Smart Beta Indices and Passive Funds
In recent years, there has been a growing interest among investors in India in smart beta indices and the passive funds that track them.
With the rise of smart beta strategies, there is now an increasing focus on alternative index strategies that aim to outperform traditional benchmarks by using factors such as value, size, momentum, quality and volatility.
Smart beta indices are designed to provide a systematic way to capture specific factors that have historically delivered higher returns than traditional market-capitalisation-weighted indices. As a result, both index funds and exchange-traded funds (ETFs) tracking these smart beta indices have seen a surge in popularity.
These funds allow investors to gain exposure to these factor-based strategies without having to pick individual stocks, making it an attractive option for both retail and institutional investors.
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Related articles:
Factor Investing in India: Do "Smart Beta" Indices Outperform Nifty 50 and Midcap 150? 24Nov2025
Nifty Midcap 150 Quality 50 Index: Has Quality Lost Its Edge? 10Aug2025
Decoding the Nifty Midcap 150 Quality 50: A Midcap Strategy Built on Fundamentals 07Aug2025
Passive Titans of India: The Top 10 Equity Indices by Fund Size 17Jul2025
Analysis of Nifty 100 Low Volatility 30 Index 12Sep2023
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2 What Are Parent and Child Indices?
In the context of smart beta and traditional market indices, "parent indices" refer to the broad-based market indices, such as the Nifty 50, BSE 500 or Nifty Midcap 150, which represent the entire market or a large portion of it. The parent indices are typically weighted by market capitalisation, meaning that the larger companies have a bigger influence on the index’s performance.
The "child indices," on the other hand, are subsets or variations of these parent indices. Child indices are often constructed by applying specific filters or rules, such as selecting stocks based on a particular factor like low volatility or high dividend yield. Essentially, child indices are a way to segment the broader market to target specific investment characteristics and / or risk exposures.
For instance, the Nifty Midcap 150 might be considered a parent index, and a child index could be something like the Nifty Midcap 150 Momentum 50 Index, which includes the 50 most momentum stocks from the Nifty Midcap 150 universe. In this case, the parent index represents the entire midcap stock market, while the child index focuses on a specific subset based on momentum.
Chart showing select Nifty indices of Parent versus Child Indices >
3 Do Child Indices Outperform Parent Indices in Practice?
The NSE Indices Ltd claims that, based on their backtesting of historical data, child indices most of the time outperform parent indices. NSE Indices Ltd is the index provider of Nifty indices.
The premise behind this assertion is that child indices, by focusing on specific factors like low volatility, momentum, high dividends or value can outperform the broader market index over time.
In theory, this makes sense. If the underlying factors in a child index are systematically designed to exploit inefficiencies in the market, then they may provide higher returns than the broader market.
For example, low-volatility stocks tend to experience less dramatic price swings, which might help mitigate losses during market downturns, potentially leading to better risk-adjusted returns.
However, while this theory may hold in some cases, the real-world performance of these child indices can be more complex. In practice, the performance of child indices often depends on the specific factors they target and how those factors perform in various market cycles.
4 Examining Funds Tracking Smart Beta Indices
(Note: In a previous blog on factor investing / smart beta investing last month, I thoroughly examined whether select "smart beta" indices outperform broad based indices, like, Nifty 50 and Nifty Midcap. In the current blog, the attempt is to find out whether funds tracking smart beta child indices outperform their respective funds tracking parent indices)
To get a clearer picture of whether child indices really do outperform parent indices, it’s useful to look at some of the funds that track these smart beta strategies.
For example, consider a fund that tracks a low-volatility index (a child index) and compare it to a fund that tracks a broader market index like the Nifty 50. Over short periods, it’s possible that the low-volatility strategy could outperform the broader market, especially during periods of high market volatility.
Conversely, during strong bull markets, the low-volatility strategy might underperform as it tends to underweight higher-growth, more volatile stocks.
Similarly, funds tracking momentum indices—child indices that emphasize stocks with strong medium term performance—could outperform in a trending market, where momentum plays a significant role.
On the other hand, during periods of market stagnation or reversal, momentum-based strategies might underperform as the stocks driving the index may see sharp declines.
Let us see whether some of the smart beta funds have outperformed their parent indices in practice:
Example 1: Comparing the performance of index funds (tracking child indices), namely, Bandhan Nifty 100 Low Volatility 30, UTI Nifty 200 Momentum 30 and UTI Nifty 200 Quality 30 with Axis Nifty 100 Index fund tracking parent index Nifty 100.
(Note: In the absence of any passive funds based on Nifty 200, Nifty 100 is used as a proxy for Nifty 200 -- it may be noted the differences in actual returns between these two indices are small)
Image showing their performance >
Click on the image to view better >
This Value Research weblink can be used to track these funds in real time.
The above image shows:
> on a 1-year basis, while the Bandhan Nifty 100 Low Volatility 30 index fund outperformed its parent index fund, Axis Nifty 100 index fund; passive child funds based on Nifty 200 Momentum 30 and Nifty 200 Quality 30 failed to beat the parent index
> On a 2-year basis, Nifty 100 Low Volatility 30 (child) scored higher returns compared to the parent Nifty 100; while the Nifty 200 Momentum 30 (child) failed to beat the parent Nifty 100
> On a 3-year basis, both Nifty 100 Low Volatility 30 (child) Nifty 200 Momentum 30 (child) have beaten the parent index Axis Nifty 100's performance
> as stated above, volatility factor tends to outperform when markets face rough weather (Indian markets have been highly volatile in the past 15 months); while momentum factor is underperforming in the past 15 months due to loss of momentum in the market
The following image from Rupee Vest shows the performance of SBI Nifty 200 Quality 30 ETF (child) versus Nippon India ETF Nifty 100 (parent)
> On a 1-year, 2-year and 5-year basis, child index fund, SBI Nifty 200 Quality 30 fails to beat parent index fund, Nippon India ETF Nifty 100
> However, on a 3-year basis, child index outperformed parent index
Example 2: Comparing the performance of index funds (tracking child indices), namely, Tata Nifty Midcap 150 Momentum Index fund and DSP Nifty Midcap 150 Quality 50 index fund with parent index fund, Motilal Oswal Nifty Midcap 150 index fund >
Image showing their performance >
Click on the image to view better >
This Value Research weblink can be used to track these funds in real time.
The above image shows:
> on a 1-year, 2-year and 3-year basis, both the child index funds, Tata Nifty Midcap 150 Momentum 50 Index fund and DSP Nifty Midcap 150 Quality 50 index fund underperformed the parent index fund, Motilal Oswal Nifty Midcap 150 index fund
Example 3: Comparing the performance of index funds (tracking child indices), namely, Nippon India Nifty 500 Momentum 50 index fund and UTI Nifty 500 Value 50 index fund; with parent index fund, Motilal Oswal Nifty 500 index fund >
Image showing their performance >
Click on the image to view better >
This Value Research weblink can be used to track these funds in real time.
The above image shows:
> on a 1-year basis, both the child indices, Nifty 500 Momentum 50 and Nifty 500 Value 50 underperformed the parent index, Nifty 500 (as stated above, Momentum factor is faring badly in the past 15 months) -- however, value factor seems to be recovering in the past six months
> on a 2-year basis, child index Nifty 500 Value 50 outperformed parent index Nifty 500 (it may recalled Value factor has done well in 2023 and 2024, though it did poorly in 2025 and 2022)
> track record for three year returns is not available for the above child index funds
Example 4: Comparing the performance of index funds (tracking child indices), namely, DSP Nifty 50 Equal Weight index fund and Nippon India Nifty 50 Value 20 index fund; with parent index fund, Nippon India Nifty 50 index fund >
Image showing their performance >
Click on the image to view better >
This Value Research weblink can be used to track these funds in real time.
The above image shows:
> on a 1-year, 2-year, 3-year, 5-year and 7-year basis, child index Nifty 50 Equal Weight index has consistently outperformed its parent index Nifty 50
> but child index Nifty 50 Value 20 has a mixed record; on a 3-year basis, it has delivered better returns compared to its parent Nifty 50 -- however, on a 1-year and 2-year basis, Nifty 50 Value 20 underperformed its parent Nifty 50
Summary of the above four examples >
One standout performance is the consistent outperformance of Nifty 50 Equal Weight over its parent Nifty 50; whereas factors, like, Low volatility, momentum and quality have shown varied performance depending on market conditions.
Nifty 50 Equal Weight has been doing well since 2020 outperforming Nifty 50 in every calendar year (2020-2025); though it underperformed Nifty 50 prior to 2020 (see chart below for data).
As you know, Nifty 50 is market-cap weighted, meaning the largest companies by market cap (like HDFC Bank, Reliance Industries, ICICI Bank, Bharti Airtel and Infosys) dominate the index. The top five or 10 stocks can often make up a significant portion of the index’s overall performance.
Nifty 50 Equal Weight, on the other hand, gives the same weight to all 50 stocks, meaning no single stock has an oversized influence on the performance. This creates more balanced exposure across the index, mitigating the risk of heavy concentration in a few large-cap stocks.
During the half-yearly rebalancing time (March and September), each stock will be adjusted to a weight of nearly 2 per cent each in the Nifty 50 Equal Weight index.
There is no guarantee Nifty 50 Equal weight will continue to deliver superior performance versus Nifty 50.
The Nifty 50 Equal Weight index outperformed Nifty 50 during periods when mid-cap and small-cap stocks experienced strong growth, particularly in 2024, 2023 and 2021, which were recovery years post-pandemic.
This reinforces the importance of market conditions when deciding between market-cap weighted indices and Equal Weight strategies.
What would cause Nifty 50 Equal Weight to underperform Nifty 50?
The Nifty 50 Equal Weight index underperforms when the market rally becomes narrow and heavily concentrated in a few mega-cap stocks. This is because the traditional Nifty 50 is dominated by its top 5-10 stocks (like Financials and certain IT/Oil & Gas heavyweights), which disproportionately drive returns during periods of market polarisation.
Furthermore, the Nifty 50 Equal Weight's inherent value / contrarian tilt—by selling winners to rebalance—works against it when market momentum is firmly with the mega-cap stocks. Lastly, its higher exposure to relatively smaller, often more volatile, Nifty 50 constituents can also lead to deeper cuts during market corrections.
Disclaimer: This analysis is provided for informational purposes only and should not be construed as investment advice or a recommendation. Please consult a financial advisor before making any investment decisions.
Calendar year returns of select "smart beta" indices versus Nifty 50 and Nifty Midcap 150 (see previous blog for more) >
5 Conclusion
The idea that child indices can outperform parent indices is intriguing, and there is evidence to suggest that, in some market conditions, these factor-based indices can deliver superior returns. However, it’s important for investors to recognize that past performance does not guarantee future results.
In practice, child indices do not always outperform parent indices, and it’s crucial to take a holistic view of the market, including risk considerations and long-term investment objectives, when evaluating such strategies.
In India, the track record for smart beta funds and passive funds based on smart beta indices is still relatively short, with several funds having only three to five years of performance data.
While backtesting shows that child indices often outperform their parent indices, real-world performance hasn’t always lived up to these expectations.
Even the asset size of smart beta passive funds is smaller compared to passive funds based on Nifty 50 or Nifty Midcap 150 (for more, see blog on passive titans of India discussing asset size)
In practice, many smart beta funds struggle to deliver superior returns compared to traditional passive funds that track broad market indices. This discrepancy highlights the challenges of translating historical data-driven strategies into consistent real-world success.
Ultimately, the performance of child indices relative to parent indices varies depending on the market environment, time horizon and the specific factors the child indices focus on. While there are instances where child indices outperform, there are also periods when the broader market (parent indices) may perform better.
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Tweet 02Mar2025 The Baloney of Smart Beta Indices
Nifty Return Profile (strategy indices)
NSE Index dashboard monthly
NSE Index dashboard archives
NSE Indices Research Papers / working papers
Nifty Indices factsheets
Methodology document for Nifty indices, including smart beta indices
Screenshot of returns of Nifty 50 versus Nifty 50 Equal Weight from 2000 to 2020 > source Nifty 50 Equal Weight whitepaper 24Feb2021 >
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