Why this fund wants to keep equal weight across 500 stocks

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Also Read: Here is what to keep in mind when investing with a new fund house “For an investor looking for a passive approach to investing in stock markets, with a well-diversified portfolio across market caps, this can be an alternative," said Arun Sundaresan, head, exchange traded funds, Nippon Life India Mutual Fund. The Nifty 500 equal-weight index has delivered annualized returns of 30% over the last five years, vis-a-vis 22% returns delivered by the regular Nifty 500 index. Over a three-year period, the equal-weight index has delivered 25.9% annualized returns against 21% delivered by Nifty 500 index.

In the past year, the equal-weight index has generated 56% returns against the 39% delivered by the Nifty 500 index. However, this recent sharp outperformance can be attributed to mid- and small-cap stocks outperforming during these periods. But over longer-term–seven-year and ten-year periods–the returns have been in-line with the regular 500 index.

“While this is an index fund, investors need to understand it is slightly more risky than a regular index fund, as it is an equal weight on a broad-based index like Nifty 500," pointed out Deepak Chhabria, chief executive officer, Axiom Financial Services. “As the equal-weight leads to reduced exposure to large-caps, it increases exposure to mid- and small-caps. If it was an equal weight on Nifty 100 or Nifty 200, the exposure would have still been restricted to large-caps." While the equal-weight index has outperformed the regular index in recent periods, the index can see higher volatility than the regular index.