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Should You Invest in Equal Weight Index Funds

Why equal weight index funds could be a game changer for your portfolio

Article 4

In recent years, equal-weight index funds have gained in popularity as an alternative to traditional market-cap-weighted funds. Instead of being more weighted towards the big companies, these funds give equal weight to each stock in the index. This is a well-regulated strategy that gives balanced exposure to investors who may be looking for diversification. In this article, we’ll see what are equal-weight index funds, why you must consider investing in them and what are their drawbacks.

Key takeaways

  • Equal-weight index funds offer the same amount of exposure across all stocks in an index.
  • They provide stronger diversification than classic funds.
  • The funds can outperform in bull markets but fall just as fast or even faster in market downturns.
  • The rebalancing costs are higher than traditional index funds which makes them more expensive.
  • It is meant for investors with a relatively higher risk propensity.

What are equal-weight index funds?

Equal-weight index funds are mutual funds or ETFs that provide an equal distribution of shares in the index. For instance, in an equal-weight fund for the Nifty 50 index — all 50 firms will have identical weightage irrespective of their size or market capitalisation. Index funds often overweigh larger companies at the expense of smaller ones.

Why consider equal-weight index funds?

  • Diversification
    Equal-weight index funds offer an increased level of diversification. Unlike market-to-cap weighted funds which are significantly swayed by large caps, these funds provide higher weightage to mid-caps and small-cap stocks
  • Potential for higher returns
    In a bullish market, relatively cheaper mid-cap and small-cap stocks can outperform large-cap stocks which results in better performance for equal-weight index funds during these times.
  • Reduced concentration risk
    Equal-weight index funds spread the investment across all components, which significantly reduces concentration risk from overreliance on a few large companies.

Drawbacks of equal-weight index funds

  • Higher costs
    Equal weight index funds rebalance more frequently to get an even allocation. This can lead to an increase in transaction costs which makes managing the funds more expensive.
  • Underperformance in bear markets
    In a recession, large-cap stocks are usually safer due to the bigger scale compared to mid-cap and small-cap stocks. Therefore, equal-weight index funds can underperform in bear markets.

Should you invest?

Especially for bold investors, perhaps looking to have broader diversification, equal-weight index funds may be an advisable choice. Nonetheless, keep in mind that these funds could be expensive and may not perform well under certain market conditions.

Conclusion

Equal weight index funds take another approach in that they treat every stock (no matter their size) equally. While they offer diversification and higher returns in bull markets since these are active funds, costs associated with them also go up along with a high risk of underperforming during downturns. To help investors in expanding their portfolios, Bajaj Finance mutual fund platform offers a suite of financial tools and resources to make informed investment choices when considering equal-weight index funds. You can choose from various mutual fund schemes and resources that make investing in mutual funds easy and hassle-free.

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Frequently asked questions

What are equal weight index funds?

Equal-weight index funds invest in each stock in an index by equally weighting all stocks, regardless of size

How do they differ from traditional index funds?

While traditional index funds carry heavier weights of the largest companies, equal weight funds give equal emphasis to each stock.

Are equal weight index funds riskier?

In bear markets, they can be riskier as a result of their mid-cap and small-cap stock exposures.

Who should invest in equal-weight index funds?

These are geared toward sophisticated, risk-tolerant investors looking to branch out into alternative holdings.

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed.

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.

Disclaimer

Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319

BFL does NOT:

(i) provide investment advisory services in any manner or form.

(ii) carry customized/personalized suitability assessment.

(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.

In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.

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Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.


Disclosure
: Bajaj Finance Limited (BFL) is a distributor of Mutual Funds with ARN - 90319 and distributes mutual funds of Bajaj Finserv Asset Management Limited (BFSAMC). BFL receives commission towards distribution of mutual fund products. BFSAMC is a group company of BFL, carrying business on arm’s length basis without any conflict of interest and in accordance with the prevailing law / regulation.

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