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Equal Weight Stocks Beat Nifty: A New Trend?
21 Jan
Summary
- Equal weight index returned 15.14%, outpacing Nifty's 11.63% gain.
- Equal weight strategy thrives when market moves are broad, not concentrated.
- Fund houses launched multiple equal weight index schemes recently.
An index of Nifty stocks with equal weighting has demonstrated superior performance over the past year. The Nifty Equal Weight Index achieved a return of 15.14%, significantly outperforming the benchmark Nifty's 11.63% gain during the same period. This divergence is attributed to the underperformance of major blue-chip stocks, whose substantial market capitalization typically dictates the broader index's movements.
Unlike traditional market-cap-weighted indices, the Nifty Equal Weight Index allocates an equal 2% weight to each constituent stock. This structure minimizes the influence of large-cap companies. The limited impact of heavyweights like TCS, Infosys, and RIL on the benchmark's performance contributed to the equal-weight strategy's success.
In response to this trend, several fund houses have introduced new investment schemes based on equal-weight indices, including the Nifty Top 10, Nifty Top 20, Nifty 100, BSE 200, and Nifty 500 Equal Weight strategies within the last 12 to 18 months. These can serve as core holdings or tactical investments depending on an investor's risk profile and market outlook.
Financial planners advise caution, noting that equal-weight strategies perform best during broad market upswings and may underperform when gains are concentrated in a few large stocks. The Nifty Equal Weight 50, for instance, returned 18.12% over three years, compared to the Nifty 50's 14%. Investors should be aware of the concentration risk, especially in indices with fewer stocks, and consider timing their entry and exit carefully.
