Equal weight index funds and ETFs: Invest if you have some risk appetite and long horizon

Equal weight index funds and exchange-traded funds (ETFs) are gaining popularity in India. Nifty 50 Equal Weight ETF.

- 

Several fund houses such as SBI, Nippon India, Mirae and DSP have launched equal weight indices over the past year.

Key differences

Equal-weight indices assign the same weight to each stock in the index, regardless of the company’s size or market capitalization. Market-cap weighted indices, by contrast, allocate weights based on the capitalization of each stock, giving larger companies a higher weight.

These two types of indices also differ in their rebalancing frequency. Equal-weight indices require more frequent rebalancing, typically quarterly, to restore equal weights as stock prices fluctuate. Market-cap indices generally require less frequent rebalancing. Consequently, equal weight indices tend to have a higher turnover than their market-cap counterparts.

Equal-weight indices are less concentrated because they offer greater representation to smaller companies. All stocks contribute equally to the index’s performance. In contrast, market-cap indices can become top-heavy, with a few large-cap stocks dominating index returns.