Hyderabad : Investment strategies have long centred around a market capitalisation weightage approach. On the contrary, Equally Weighted Index Funds give equal weightage to all the shares in the indices and create a chance of earning a steady reward. Consider Nifty 50 index which avoids the risk of over-investment in a limited number of companies. There will always be benefits in investing in very strong companies that have stood the test of time. Concentrating investments in a few shares or over-allocating investments to two or three sectors can be done away with.
The equal weight index investment method was first introduced in the US in 2000 with the S&P 500 Equal Weight Index. After that, it was followed in all countries. The first fund based on the Nifty 50 index came in 2017 in our country. Over the past few years, the S&P 500 as well as other equally weighted indexes have outperformed market capitalization-weighted funds over the long term.
The equal weight index recorded more returns during the period of 'depolarization' in the stock market. When there is a concentrated trend in the market, shares with a higher weightage in the index will gain. But all share prices rise during depolarization. Therefore, equally weighted index schemes become attractive in cases of 'depolarisation'. After the biggest economic recession in 2009, this was seen in the rallies in the stock market in 2020, after Covid-19.
If you want to diversify the value of your investments, there are two basic investment principles to follow. They are - investing in shares of major companies and choosing diversified companies from different sectors. This approach is superior to the market cap index-based investment approach. At the same time, the investment cost is also low.
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An equal-weighted approach is better for institutional investors like corporate treasuries and exempt PF trusts. This method offers lower risk and higher reward than the market cap-weighted method. A very good investment strategy. Therefore, it can be said that ETFs and index funds are a must in everyone's portfolio.
Equally weighted index funds maintain a balance of investments with the objective of long-term wealth creation. Avoid centralized investments. All shares in an index are weighted equally. Thus reducing the risk of loss. Nifty 50 equal weight index has outperformed the Nifty 50 index for many years. From 1999 to 2022, the Nifty 50 equal-weighted index gave an average annual return of 2 per cent higher than the Nifty 50.
Equally weighted index funds may perform differently in different situations based on stock market conditions. The inclusion of Equally Weighted Index Funds in an investor's portfolio maximizes benefits. These funds are a must for institutional investors, especially corporate treasuries and exempt PF trusts. 'Index Investing' is a very simple process.
