Tipping Point: What is an equal-weighted index?

Representational image. Photo: PTI
DSP BlackRock Mutual Fund recently launched an index fund based on the equal weighted Nifty 50 index. Most indices we come across, such as the Nifty, Sensex, BSE 200, BSE 500, etc, are market capitalisation (m-cap)-weighted. This means the weight of stocks in the index is in proportion to their m-cap. Stocks having a higher market cap tend to dominate these indices. In an equal-weighted index, all the stocks, big and small, have an equal weight.  

Is it a better bet for investors?  

Both an m-cap weighted index and equal-weight index have their own pros and cons. Since an m-cap-weighted index is dominated by heavyweights, it is likely to be more stable. In an equal-weighted index, since all the stocks, including the relatively smaller ones, have the same weight, it is likely to give higher returns over the long term. The logic is that (relatively) smaller stocks tend to grow faster than bigger counterparts over the long term. 

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel