Equal vs Market Cap investments
Nimit Brahmbhatt
Entrepreneur | Finance Storyteller & Author of “Investing over a cup of tea: My not so profound thoughts on investing”
Last week I was reading a few things and suddenly I started thinking that as a commoner or a retail investor if I create a small case, will equal equal-weighted stocks will give me better returns or market cap weighted stocks will provide me with better returns.
While comparing the data, we understand that majority of the investors are investing in passive funds such as an index fund. Now, as the majority of the Investors are investing in index funds, I made a comparison of the Nifty 50 with the Nifty 50 equal weightage index which is there.
From the data which is based on the Total Return Index values, it can be seen that over the period Nifty 50 Equal Weight index has provided a better return on the CAGR basis over the longer time period. Considering the recent past 3 years, Nifty Equal weight seems to have underperformed in the year 2018 and 2019 because of the COVID-19 scenario as well as the supply chain disruption.
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Also, in Nifty 50 the weightage given to Reliance is 10.13% which earns the majority of the revenues from crude oil as well as the revenue from the telecom sector because of JIO and consumer spending in this segment increased. Even the companies which increased and made the benefit over a period of time are given a better weightage resulting in outperformance of the index.
Nifty Equal weight index has outperformed Nifty50 in 13 out of 22 calendar years from 1999 onwards. The Nifty Equal Weight Index tends to outperform the Nifty 50 when there is a broad market rally. In the recent year, you can see that when the market fell down in 18 and 19 and then right now we are seeing the broad market rally, in 2020 the Nifty Equal Weighted Index has again outperformed Nifty, in 2009 after the financial crisis, 2016 after Jandhan accounts, 2002 after the dotcom boom.
In what to invest in
Again it is a difficult choice if you are trying to keep equal weightage or market cap weightage, but as the majority of the investors don't have enough patience to go through the downside of the market, they shall remain invested in market cap weighted and to try some new strategy, you can also invest in the equal weightage index funds as the companies are same but with equal weight given to each other which is rebalanced on a quarterly basis.