Equal weight index funds can be seen as a variation of typical index funds. While market indices like Nifty 50 include 50 companies based on their market capitalization, a Nifty 50 equal weight fund will select the same fifty companies while giving equal weightage to all of them. In this case, all fifty companies would have exactly 2% weightage.
It does sound interesting, but should you invest in it. There are a few pointers that can sway your decision.
Reliable return – Market-cap-based funds with benchmarks like S&P 500, Nifty 50, and Nifty 100 have had comparable returns with equal weight index returns. For instance, since equal weight funds started, Nifty 50 returns till the beginning of 2021 have been around 11-12%, in both the fund types. This makes equal weight funds a reliable addition to your investment portfolio.
Controlled volatility – If you don’t want your investment to be too volatile, an equal weight fund is a good option. Momentum-driven market scenarios can lead to excessive valuation and weightage of certain stocks in a market-cap-based fund scheme. If the shares of a company with a large market cap perform poorly, it can have a negative impact on the overall performance of the market-cap-based fund and increase its volatility.
Regular rebalancing – Equal weight index funds often keep the option of regular rebalancing. As all shares are maintained in equal percentage, if any stock exceeds the specific percentage, the fund manager sells surplus, and the profit is reinvested, thus improving the Net Asset Value of the scheme. This rebalancing helps the scheme to book regular profit while maintaining equal weightage of the stocks.
Risk management – While stocks that outperformed are regularly rebalanced for profit, the losses in equal weight funds can be expected to remain under control. This is because the component stocks are all large-cap and have a limited chance of prolonged free-falling. Thus, equal weight funds moderate the volatility while keeping the overall safety of the fund portfolio intact.
All mutual funds aim to maximize the alpha. Actively managed funds achieve this, but by shuffling between market caps and increasing the risk exposure. Regular index funds are passively managed, so while the alpha is lower, their risk and expense are low too. Equal weight funds try to strike a balance by targeting higher returns while maintaining a large-cap safety blanket and reducing volatility. In the last two decades, the comparison between regular index funds and equal weight index funds has been too close to call.
Nevertheless, if you were to pick an equal weight index fund, use the convenient platform of the Tata Capital Moneyfy App. You can find all about their past performances in Moneyfy and also start your investment in equal weight index mutual funds.