We all know about two of the most popular indices in India: the Sensex and the Nifty. The Sensex is based on a free-float market-weighted index that takes the average movements of the top 30 companies that are listed on the BSE. These companies are the largest, most actively traded and representative of different sectors in the economy. Similarly, Nifty consists of the 50 most actively traded stocks.
When we look closely at the weights of different sectors in the Sensex, we can see that it is heavily concentrated towards banking, finance and Information Technology. The same goes for the Nifty index. To avoid such concentrated representation, a new concept of equal-weighted index funds was launched.
Here, we will discuss Equal Weighted index funds in detail and also highlight important factors that investors should know.
An equal-weighted index in the stock markets is an index that places equal value on all the stocks included in it. Thus, every stock that is part of the index will have the same significance while estimating the index’s value. This is irrespective of whether the listed company is big or small or a company’s stock value.
Unlike a capitalisation-weighted index, an equal-weighted index places all the stocks in it on the same level while determining the index’s value. In the case of a capitalization-weighted index, higher-value stocks and large-sized companies enjoy higher weightage in the index’s makeup and therefore tend to dictate the index performance.
An equal-weighted index fund is similar to an index fund or an ETF, where the fund invests primarily in the constituent stocks of the underlying or benchmark index. Equal-weighted index funds invest in stocks of publicly traded companies and distribute the pooled funds equally among all the stocks of the underlying index. Thus, the performance of each stock equally impacts the index fund performance.
World over, the standard followed by stock market indexes is to give weights to stocks as per the market capitalizations of the companies included in the index.
Thus, if an index fund is following the NSE Nifty index, it weighs stocks by market capitalization and invests more in some companies than others. Irrespective of the overall size of companies that are included in an index, whether small-cap, mid-cap, or large-cap, the index fund favours the largest companies that are included in the index.
While learning about the concept of equal-weighted index funds and before investing in them, investors must carefully weigh the associated pros and cons. Some of them are listed here:
Equal weighted index funds are best suited for the following:
Equal-weighted index funds, although new to the Indian markets, have been known to exist in the international markets. Equal-weighted index funds can be good alternatives to getting exposure to the overall market value. The choice between equal-weighted index funds and regular market capitalization-weighted index funds comes down to an investor’s financial goals, risk appetite, and investment portfolio construct.
The Nifty50 Equal Weight Index Fund follows the benchmark index that is based on a weighting strategy where all the 50 companies in the index are weighed equally, irrespective of their market size.
Index Funds are passive mutual funds that replicate the composition of the chosen benchmark index. These are passively managed, as the fund manager doesn’t play an active role in investment selection. Index funds mostly aim to follow the performance of the benchmark index rather than beat it.
To invest in some of the top-performing index funds, investors can explore the Fisdom app, which is available for free download. This app allows access to a range of mutual fund schemes with an easy KYC and investment process.
Like any equity-based mutual fund, equal-weighted index funds also concentrate on equity investments and therefore carry some amount of risk. The risk level could differ across funds, however, these are relatively less risky as compared to actively managed equity funds.
Any passive mutual fund returns are dependent on many factors, such as tracking error, benchmark index performance, market volatility, etc. Therefore, to gauge whether an equal-weighted index fund can offer good returns, one must consider all these factors along with historical performance.
This Diwali, we present a portfolio that reflect both sector-specific and stock-specific opportunities. With 2…
Thank you for showing interest in taking a BTST position using our Delivery Plus product.…
Thank you for showing interest in the consultation on trading strategies! Our expert will reach…
Even if you are a new participant in the stock market, the process of buying…
A company’s debt position can be gauged using the interest coverage ratio or ICR. This…
Muhurat Trading, a cherished tradition in the Indian stock market, takes place on Diwali, the…