Should You Invest In Equal Weight Index Funds

Equal-weight index funds (EWIFs) can be a good investment for investors who want to diversify their portfolio and reduce risk.
Should You Invest In Equal Weight Index Funds
3 min
16-June-2024

An equal-weighted index fund is a mutual fund or an exchange-traded fund where the investment amount is shared equally amongst the stocks of each company of the fund. It is different from the traditional index funds, which share the investment amounts on a preferential basis. In other words, if you invest in an equal weight index fund, the performance of each company’s stock will carry equal importance.

If you want to invest in equal-weight index funds, you will not only have a diversified investment portfolio but you will also be able to minimise the risk. So, if you are wondering whether you should invest in equal-weight index funds or not, this article will give you enough information to make a wise investment decision.

Understanding equal weight index funds with example

Nifty 50 represents the performance of 50 of India’s largest companies that are listed on the National Stock Exchange. Now, if you want to invest specifically in these 50 companies, you will have to invest in an index fund that tracks Nifty 50 companies.

If you invest in equal weight index fund that tracks Nifty 50 companies, your investment amount would be spent in purchasing an equal number of stocks of these 50 companies. There will be no preference in place for any company’s shares, irrespective of the company’s market size or any other factor.

Should you invest in equal-weight index funds

Whether you invest in an equal-weight index fund or not depends on your investment objectives and goals. Here are some factors you can consider before investing in this type of fund:

  • Your risk appetite: Like any investment product, an equal-weight index fund is prone to market risk, however, the risk is less in this case. You should assess whether the equal weight index fund meets your risk tolerance level or not.
  • Long-term commitment: Investing in an equal weight index fund demands a long-term commitment to avail maximum benefits. If you are willing to commit for the long term, then you should invest in an equal-weight index fund.
  • Limited control: If you do invest in an equal weight index fund, there is very little control that you exert afterwards on the choice of stocks and quantum of investment in each stock.

Advantages of equal weight index funds

If you invest in an equal weight index fund, you are sure to benefit from a wide range of advantages. You will primarily benefit from the better diversity that the fund has to offer, as each company’s progress will be equally significant for your portfolio. Therefore, the investment risks would not be concentrated on a few companies who are otherwise given preference.

Another important advantage of an equal weight index fund is that you would also be exposed to smaller companies with a greater potential to grow and expand.

Market-cap-weighted vs equal-weight indices

There are two types of index-based funds, one of which gives an equal weightage to all the assets under management of the company, thus called equal weight index fund, while the other type gives preference to stocks of companies based on their market cap, called market-cap weighted index fund.

Here are the key differences between the two indices.

 

Market cap weighted index

Equal weight index

Weighting method

Companies with higher market capitalisation are given more weightage

All companies are equally weighted

Investor preference

Preferred by those investors who do not necessarily want to invest for the long term

Preferred by those investors who necessarily want to invest for long-term

Diversification

It has limited diversification compared to an equal weight index

It offers comparatively more diversification

Risk

Comparatively high risk

Comparatively low risk

 

Disadvantages of equal weight index funds

As with every instrument product, there are advantages as well as disadvantages. So is the case with the equal weight index fund. Here is the list of disadvantages of equal-weight index funds.

  • Costs: The transaction costs of equal-weight index funds are higher, which leads to a higher expense ratio than other funds.
  • Volatility: The volatility of markets can severely impact an equal-weight index fund as all the stocks are equally hurt in time of a market crisis.

Here are some tips for following the 15x15x15 rule

The 15x15x15 rule refers to the mutual fund SIP (Systematic Investment Plan) where an investor invests Rs. 15,000 per month for a tenure of 15 years at a return rate of 15 per cent. It is a long-term investment strategy which ensures a return of significant corpus at the end of the fund term.

Conclusion

Investing in equal-weight index funds is a long-term investment product with reduced risk threats. It is a mutual fund for those investors who do not need immediate returns but they have a low-risk appetite. You should carefully read the policy documents when investing in any product and understand the risks associated with it.

The Bajaj Finserv Mutual Funds Platform can help you find the ideal category of mutual funds and alternative investment funds for your portfolio. You can check out 1,000+ mut and start a SIP investment or make a lump sum investment in any fund you choose.

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Frequently asked questions

Are equal weighted index funds better?

Equal weighted index funds have their advantages and disadvantages. You should decide your investment product based on your investment goals and objectives.

Is it good to invest in Nifty 50 Equal Weight index fund?

Nifty 50 Equal Weighted Index Fund is a good way for long-term, minimum risk investment. However, it depends on your investment objectives whether it is good for you or not.

What are the advantages of equal weighted index?

The key advantages offered by an equal weighted index fund is that they offer diversity, minimum risk, and exposure to smaller companies which have a potential to grow.

What is the difference between index fund and equal weight index fund?

An index fund is a mutual fund or ETF which invests in a group of shares categorised on basis of market indices.

What is the equal weight strategy?

Equal weighted strategy means the investment is equally distributed in all the shares of the fund.

Is equal-weighted better than cap weighted?

It depends on your investment objectives and goals.

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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.