Equal weight index funds offer a unique, balanced approach to passive investing by allocating equal capital to each stock in an index, unlike market-cap-weighted funds. These funds are gaining traction. What sets them apart, and are they right for you? Let’s break it down.
What Are Equal Weight Index Funds?
Equal weight index funds invest equally in all companies within a specific index. For example, in an equal-weight Nifty 50 fund, each of the 50 companies would hold a 2% share of the portfolio. This contrasts with market-cap weighted funds, where giants like Reliance and TCS dominate.
This strategy reduces overexposure to top-heavy sectors and companies. As a result, investors benefit from broader participation in market gains. Moreover, mid-cap and small-cap companies—often overlooked in cap-weighted indices—get more representation.
Benefits: Diversification and Reduced Concentration
One major advantage is risk diversification. Since no single stock can overly influence the fund, it lowers concentration risk. This is crucial in India’s market, where a few large players often drive index performance. Another benefit is participation in broader market trends. Mid-cap and small-cap companies are often more agile and can deliver strong growth. Equal weight funds give these companies a fair share, unlike market-cap-weighted funds that sideline them.
This strategy also promotes discipline through periodic rebalancing. Equal weight funds need to rebalance regularly to maintain equal allocation. This practice forces a buy-low-sell-high mechanism—automatically trimming gains from overperformers and adding to underperformers.
Risks and Taxation:
These funds in India face risks. Higher exposure to smaller stocks increases volatility—a 5% Nifty dip in 2024 hit equal weight funds by 6%, per IBEF. Frequent rebalancing raises transaction costs, slightly denting returns. Taxation follows equity rules: 20% short-term gains (under 1 year), 12.5% long-term (over ₹1.25 lakh), per SEBI. Moreover, they may underperform in markets driven by large-caps, as seen in 2023’s tech rally, per Value Research.
Considerations Before Investing:
While these funds in India offer advantages, investors should also be aware of some trade-offs:
- Higher churn: Frequent rebalancing can lead to increased transaction costs.
- Underperformance in bear markets: Since these funds include more exposure to mid-caps, they may be more volatile during downturns.
- Limited options: Compared to market-cap-weighted funds, the number of equal weight offerings in India is still small.
Conclusion:
Equal Weight Index Funds in India offer a balanced, low-cost path to wealth, emphasizing diversification. While they aren’t a one-size-fits-all solution, they provide balanced exposure that can potentially enhance returns and reduce risk over time. Ready to invest wisely? Explore more fund insights now!
– Ketaki Dandekar (Team Arthology)
Read more about Equal Weight Index Funds here – https://www.bajajfinserv.in/equal-weight-index