By Balwant Jain
Passive fund AUM in India has gone up by 22% in the last six months which reflects an increasing preference for passive investing. This has partly happened due to the fact that the majority of actively managed mutual fund schemes especially in the large-cap category are not able to beat their benchmark indices.Funds based on Sensex and Nifty 50 which represent broader market offer you the avenue for passive investing. Beside the Nifty 50 index, the NSE also has constructed many variations of this broader market index. Nifty 50 Equal Weight Index is one of such variant.
Let us understand what is Nifty 50 equal weight Index and why and who should invest in it.
What is Nifty 50 Equal Weight?
The benchmark Nifty 50 Index is constituted by top 50 shares listed on National Stock Exchange. The weight assigned to each constituent company is determined on the basis of its free float capitalisation which results in company with higher free float capitalisation getting higher weight in the index. The Nifty 50 Equal Weight Index also has the same 50 constituents but each company has equal weight in it. In the equal weight index strategy, all stocks are treated equally and hence smaller firms are held in the same proportion as the larger ones avoiding the valuation or size bias.
This Index is rebalanced quarterly to correct the imbalance caused due to relative price rise/fall of the constituent companies. It is reconstituted every six months in line with reconstitution of the parent Nifty 50 Index.
How one can invest in Nifty 50 Equal Weight Index?
An index as such cannot be bought or sold in the market but one can take exposure to the index through mutual fund schemes which replicate this index. Presently HDFC Mutual Fund, DSP Mutual Fund, Aditya Birla Sun Life mutual fund offer the Nifty 50 Equal Weight Index Fund schemes with ICICI Prudential Mutual Fund joining the bandwagon with its NFO which is open till 28th of September, 2022.[Explained] ITR: When does your income gets added to another person’s income?
Pros and Cons of investing in Nifty 50 Equal Weight Index funds
As the weightage assigned is different under Nifty 50 Index and Nifty 50 Equal Weight Index, the investors get to diversify their investments in the same broader market. With equal weight to all the constituent companies the Nifty 50 Equal Eight Index helps you in avoiding the company specific concentration risk. For example, two top companies i.e. HDFC and Reliance have concentration of 20% under Nifty 50 whereas the same gets reduced to 4% under Nifty 50 Equal Weight Index.
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