Lower concentration risk, outperformance during broad rallies

Mirae Asset has launched the Mirae Asset BSE 200 Equal Weight Exchange-Traded Fund (ETF) and Fund of Funds (FoF). The new offers opened for subscription on February 24, 2025, and will close on March 5, 2025.

 

Understanding equal weighted indices

 

An equal-weighted index assigns the same weight to every stock, re­g­ardless of market capitalisation. “In a BSE 200 Equal Weight index, all stocks receive 0.5 per cent weight at the time of rebalancing,” says Siddharth Srivastava, head–ETF product and fund manager, Mirae Asset Investment Managers (India).

 

A market cap-weighted index like the Nifty 50 allocates weights based on free-float market capitalisation. “Larger stocks carry higher weight, while smaller stocks have a lower allocation,” says Srivastava.

 

Assigning equal weight cha­nges the nature of the index. “Giving the same influence to smaller companies as to larger ones leads to a different risk-return profile,” says Arun Sundaresan, head–ETF, Nippon Life India Asset Management. 

 

Lower concentration risk

 

An equal weight index has a higher chance of outperforming in a broad market rally.

 

“The bottom 10 stocks in Nifty 50 have close to 7 per cent weighting but have a 20 per cent allocation in an equal weight index. This can have a signifi­cant impact in case of a broad-based market movement,” says Gurjeet Singh Kalra, business head–passive funds, DSP Mutual Fund.

 

Eliminating the size bias also leads to diversification. “An equal weight index also offers wider sector participation as

 

the top three sectors comprise around 46 per cent of the portfolio compared to 60 per cent for the Nifty 50 Index,” says Sharwan Goyal, head of passive and fund manager, UTI Asset Manage­ment Company (AMC).

 

Overexposure to certain sectors gets reduced. “The balanced allocation reduces sectoral concentration risk and limits the impact of downturns,” says Chintan Haria, principal–investment strategy, ICICI Prudential Mutual Fund.

 

Underperformance in polarised markets

 

These funds underperform in polarised markets. In 2019, market gains were led by a few heavyweight stocks. “The Nifty 50 Total Return Index (TRI) returned 13.5 per cent, while the Nifty 50 Equal Weight TRI lagged at just 4.3 per cent,” says Haria.

 

This strategy often results in higher portfolio turnover, leading to increased trans­action costs. “This impact is more pronounced in indices tracking a broad universe of 500 or more stocks, especially for funds with large assets under management (AUM),” says Goyal.

 

Are they right for you?

 

Equal-weighted funds are suitable for investors seeking diversification beyond largecap stocks. “These funds work well as a satellite component, complementing large-cap index funds or as a tactical allocation for broader market participation,” says Haria.

 

Investors who can tolerate their higher risks may go for these funds. “Invest only if you can accept cyclicality and the ETF’s risk profile aligns with your investment goals,” says Srivastava. Various equal-weighted indices offer differing risk levels. “A Nifty 50 Equal Weight Fund suits those seeking largecap exposure with lower concentration risk, while Nifty 500 Equal Weight offers broader diversification across large, mid, and smallcaps in a 20:30:50 ratio,” says Sunda­resan.

 

Haria recommends asses­sing the index composition, historical volatility, and rebalancing frequency before investing. According to Haria, conservative investors may limit exposure to 10-15 per cent of their equity portfolio, while aggressive investors can allocate up to 20-25 per cent.

 

According to Kalra, if investors can hold these funds for eight years or more, they can use equal weight funds to meet long-term goals.