Maximise your returns: Why equal-weight index funds rule the mutual funds market

Equal-weight index funds, such as Nifty 50, offer cost-effective, diversified, and potentially profitable market exposure, making them an attractive option for investors.

Balancing risk and reward is the key obstacle in investing or choosing the best investment funds. Consequently, experienced investors have preferred equal-weight index funds and smart beta funds in recent years. Their focus is on value investing instead of large-cap funds that prioritise momentum.

Highlights:

• Investors should choose equal-weight index funds over momentum-focused large-cap funds.

• Equal-weight index funds offer rebalancing benefits for balanced asset allocation and are cost-effective.

• Equal-weight index funds ensure equitable impact for all companies and help mitigate corporate governance issues.

Why choose equal-weight index funds?

Equal-weight index funds aim to strike a balance between overvalued and undervalued assets. During the rebalancing process, the objective is to buy shares of companies whose stock prices have declined while selling those that have experienced price appreciation. In contrast, large-cap funds focus on increasing exposure to companies whose stock prices have risen following a momentum-based approach.

Regarding expenses, equal-weight index funds typically have fees compared to market cap-weighted index funds that track popular index funds such as NIFTY 50 or SENSEX. The cost difference can be attributed to fund management companies frequently charging higher fees for introducing index funds like equal-weighted ones. This is in contrast to the straightforward market cap-weighted options.

Also Read: UTI's new debut: Nifty 50 equal weight index fund

What are the benefits of equal-weight mutual fund options?

• Equal-weight index funds bolster diversification by ensuring that every company, regardless of size, exerts an equitable impact on the portfolio.

• NIFTY 50 equal-weight index funds offer a cost-effective investment alternative with lower fees than those associated with actively managed funds.

Role of corporate governance

The equal-weight index revolves around safeguarding against the broader repercussions of corporate governance problems. Predicting these problems is difficult compared to forecasting quarterly financial results. Regarding quarterly financials, ample analyst coverage and market disclosures exist to aid decision-making. This makes them a considerable mutual fund investment strategy.

In contrast, corporate governance issues tend to surface suddenly and can inflict severe damage on mutual funds if a major player is embroiled in such matters. The market witnessed such a situation a few months ago. An equal-weighted index would experience comparatively less impact and distress in such scenarios. It can also be likened to a team of skilled players, each with an equal role in achieving the team's objectives.

Also Read: How to craft the ultimate diversified portfolio with large-cap, small-cap, or index funds

The bottom line

Equal-weight index funds or NIFTY 50 equal-weight index funds have considerable investment benefits. When investing in mutual funds, covering more benefits with fewer risks is always important. So, this is your chance to make an informed choice.

Disclaimer: The content in this article is for informational purposes and does not constitute financial advice. Consult with a financial advisor before making any investment decisions.

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