The Debate: Nifty 50 Index Funds vs. Nifty 50 Equal Weight Index Funds - Which is Sahi for You?

The debate between Nifty 50 and Nifty 50 Equal Weight Index Funds continues, with each approach having its advantages and drawbacks.

Introduction

In recent times, the allure of investing in index funds has grown significantly. More and more investors are exploring the world of index funds, specifically Nifty 50 Index Funds. These funds track the Nifty 50 Index, which is a benchmark index of the National Stock Exchange (NSE) in India. This index offers investors a diversified portfolio consisting of India's top 50 companies across various sectors, all at a remarkably low cost. However, amidst the growing interest in index fund investing, the performance of Nifty 50 Equal Weight Index has been generating quite a buzz.

Understanding Index Construction

Before delving into the performance comparison, it's essential to comprehend the popular methods of constructing an index. There are three primary ways to construct an index: Market Capitalization-Weighted Index, Price-Weighted Index, and Equal-Weighted Index.

1. Market Capitalization-Weighted Index

The Market Capitalization-Weighted Index (cap-weighted index) assigns weights to its components based on their total market capitalization. Larger companies hold a greater weight in the portfolio, while smaller ones have a more modest influence.

The top stocks in the market cap-weighted index include:

- HDFC Bank: 13.3 per cent

- Reliance Industries: 9.21 per cent

- ICICI Bank: 7.74 per cent

- Infosys: 5.95 per cent

- ITC: 4.57 per cent

- Larsen & Toubro: 4.24 per cent

The sector weightage composition is as follows:

- Financial Services: 35.9 per cent

- Information Technology: 13.77 per cent

- Oil, Gas & Consumable Fuels: 11.24 per cent

- Fast Moving Consumer Goods: 9.29 per cent 

- Automobile and Auto Components: 6.21 per cent

2. Equal Weighted Index

An Equal Weighted Index invests the same amount in every company within the index, eliminating market cap bias. This equal opportunity approach ensures that even smaller companies have a significant impact on the index.

The top stocks in the equal cap-weighted index include:

- Hindalco Industries: 2.09 per cent

- Larsen & Toubro: 2.08 per cent

- Coal India: 2.06 per cent

- Sun Pharmaceutical Industries: 2.06 per cent

- NTPC: 2.05 per cent

- Axis Bank: 2.05 per cent

The sector weightage composition is as follows:

- Financial Services: 20 per cent

- Automobile and Auto Components: 12 per cent

- Information Technology: 11.72 per cent

- Healthcare: 10.19 per cent

- Fast Moving Consumer Goods: 9.9 per cent

Performance Comparison

Nifty 50 Index Funds tend to excel in a polarized market, where a few dominant names drive returns. On the other hand, Nifty 50 Equal Weight Index performs well in a scenario of broad-based market rallies. For example, in 2019, DSP Nifty 50 Equal Weight Index Fund yielded a modest 3.77 per cent return, while Nifty 50 Index Funds soared to about 13 per cent (direct plan). In 2021, the same DSP equal weight fund delivered an impressive 31.65 per cent return, in contrast to the Nifty 50 Index, which advanced by 23.79 per cent.

Here is a comparison chart of DSP Nifty 50 Equal Weight Index Fund vs. DSP Nifty 50 Index Fund:

Conclusion

The debate between Nifty 50 and Nifty 50 Equal Weight Index Funds continues, with each approach having its advantages and drawbacks. Market cap-weighted indexes offer better diversification and lower costs, making them an attractive choice for many investors. On the other hand, equal-weighted indexes provide an equal opportunity to all companies, which can be advantageous in a broad-based market rally.

As for which one is the better index to invest in, it remains a challenging question to answer definitively at this point. There is not enough data to declare a clear winner. Ultimately, the choice between these two index funds should align with your investment goals, risk tolerance, and market conditions. Both approaches have their merits, and investors should carefully assess their unique circumstances before making a decision. In the world of investing, there are seldom one-size-fits-all solutions, and the best choice depends on your individual financial objectives.