Mutual fund investors should use Nifty Equal Weight, diversify rebound bet

Investors eyeing a diversified large-cap portfolio, benefiting from a broad-based earnings recovery and with low concentration in individual stocks, can consider an investment in the Nifty 50 Equal Weight Index.

The Nifty 50, one of the most widely followed indices, assigns weights to stocks based on free-float market capitalisation. By contrast, the Nifty 50 Equal Weight fund has the same constituents as the Nifty 50, but allocates only 2% to each stock, with rebalancing at the end of each quarter.

"Equal-weighted indexes work better when broader markets are rising as market-cap-weighted indexes have less allocation to the same stocks in the index," said Kunal Valia, CIO-listed investments, Waterfield Investment Advisors.

Fund managers said the Nifty 50 has a high concentration in two sectors - financials at 35% and technology at 18%. Compared with this, the Nifty 50 Equal Weight has a 22% weight on financials and 10% on IT.

"An equal-weight strategy has lower stock and industry concentration. It offers a disciplined investment approach with no bias where each stock contributes equally," said Anil Ghelani, head of passive investments and products, DSP MF.

Fund managers believe as earnings growth picks up in the broad economy and a new economic cycle begins, the Nifty will further depolarise, which could lead to Nifty Equal Weight outperforming the Nifty 50.

"Since June 2020, depolarisation has begun with the weight in the top 10 stocks falling from 62.7% to 58.3%, leading to Nifty Equal weight outperforming Nifty 50," said Ghelani.

In this period, the Nifty 50 gave an absolute return of 82.7% versus the Nifty Equal 50 return of 99.7%. Nifty Equal 50 has outperformed the Nifty 50 since inception, returning 16% compared with the Nifty 50 annualised return of 14.1%.

As depolarisation further picks up, the Nifty Equal Weight Strategy could generate alpha over the Nifty 50. Nifty 50 Equal Weight has outperformed the Nifty 50 index in 12 out of 21 calendar years.

While DSPs Equal 50 strategy is more than four years old, HDFC and Aditya Birla Sun Life have offered this strategy over the past year.