On a 5-year basis, the market-cap weighting is the clear winner. Here is a table that shows how the equal-weight NIFTY 50 index is a lot more diverse in terms of its holdings and sectoral allocation, as compared to the market-cap-weighted NIFTY 50 index. Also, an equal weight index is certainly a lot more diversified as compared to the market-weighted index.Ī case in point is the NIFTY 50 index. Traditionally, an equal weight index is more value-oriented. In other words, consider an equal weight index like a perfectly balanced ship that is looking to avoid the storms that are often created by price momentum or valuation biases. In that case, all the 50 companies are conceptually weighted at an equal 2%. For instance, say the index under consideration is NIFTY 50. Simply put, an equal-weight index is an index where every stock in the index carries the same weight. One way to counteract the over and under weighted-ness of a market-cap weighted index is to go for an equal-weight index. ![]() But again, if you are a long-term investor, short-term volatility shouldn’t be a major concern. Nonetheless, when these expensive stocks become unsustainably expensive, it eventually leads to a quick and deep market-wide correction. Another way to look at it is that Index Funds are partly responsible for extending bull runs by making stocks more and more expensive. This ends up disproportionately increasing the price of some stocks at the expense of others. So, every additional rupee that gets invested in an Index Fund adds more fuel to the existing distortion. In other words, a market cap index gives a higher weight to an overvalued stock and a lower weight to an undervalued stock. In that context, almost every stock is overvalued or undervalued at any given point in time. In this blog, we will focus on explaining the advantages and limitations of market-cap-weighted index funds. So, we will not go into the details of those aspects here. ![]() We have a blog on what comprises the large-cap, mid-cap, and small-cap universes and how their risk and returns vary. For instance, the NIFTY 50, the SENSEX, the NIFTY Next 50, the NIFTY Midcap 150, NIFTY Smallcap 250, and the NIFTY 200 are all examples of indices that are market-cap weighted. A majority of the available indices are weighted by their market capitalization. It is an aphorism that is deeply entrenched in our society. But you should not be particularly bothered with the overlapping as long as you are diligently tracking your overall asset allocation across large, mid, and small-cap companies, irrespective of whether you are investing via Mutual Funds or stocks. Nonetheless, if you invest in a Broad Market Index and you also invest in other Index Funds, then there is bound to be some overlap in the holdings. And therefore, they are an excellent investment option for long-term investors. To sum up, Broad Market Index Funds simply look to capture the total performance of the stock market. In fact, a good chunk of investment in Index Funds in the US goes into their broad market funds like the Wilshire 5000 Total Market Index Fund, the Russell 3000 ETF, and the Vanguard Total Stock Market Index Fund. ![]() ![]() Globally also there are multiple Index Funds. Another example is the Navi Total Market Index Fund which will give investors exposure to 750 stocks across large-cap, mid-cap, small-cap, and even micro-cap companies. One such example is the Motilal Oswal NIFTY 500 Fund. For instance, an Index Fund tracking the NIFTY 500 index is a Broad Market Index Fund because it gives investors exposure to stocks across different sectors and market caps. A Broad Market Index Fund tries to replicate a large segment of the investible stock market.
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