How to decide weightage strategy for index funds

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Index funds are a type of mutual funds which are also known as passive funds. These funds track the index of the market or sector where they are invested. They are not linked to any single stock, debt or company, in fact, their underlying asset is the benchmark indices. Often, index funds are associated with low to medium-risk.

Index Funds do not follow the benchmark only on the basis of market cap but funds are coming in on the basis of equal weightage and price weightage. Are these right for you? Money9 Helpline hosted the founder of FinFix, Prableen Bajpai to answer all these questions.

Edited excerpts

Ramesh Saini, Itawa: HDFC launched the Nifty50 equal-weight index fund today. Is it a good fund to invest in for beginners?

Bajpayee: Nifty50 equal weight as a strategy if we consider, is good for Indian investors. A slightly better than the regular nifty funds. We generally have a portfolio of active funds. The equal-weight strategy gives equal proportion to the top 50 stocks. It also reduces the overall portfolio’s concentration risk. A nifty equal is a good option but I feel you should not go with the new fund, rather invest in the existing fund.

Arun Singh: Please suggest a normal index fund or equal-weighted index fund which will be better for 25+ horizon. Should I invest 50% in normal and 50% in equal-weighted. Also, suggest fund house for index fund with low tracking error. A lot of funs calculate tracking error differently so I’m confused to choose the correct one.

Bajpayee: Pick the last 21 years’ performance. If we see calendar returns of 12 years then nifty equal weight have performed well. For the rest of the years, nifty regular funds have performed well. So it is very difficult to say. We can say that where there is the polarisation of markets that is a couple of stocks are pulling the market, regular nifty will perform there. And where there is a broad-based rallying there equal weight will perform better.  In the last one year equal weight has outperformed. I feel you can choose one based on your comfort as both the funds are large caps.