Between the Nifty 50 Vs Nifty 50 Equal Weight Index, which is a better Index for risk-adjusted returns? Let us try to understand with 25 years of past data.
The Nifty 50 Equal Weight Index consists of the 50 stocks with the highest market capitalization, all having equal representation in the index. On the other hand, the widely used Nifty 50 is based on market capitalization exposure. This article explores the effects of equal weighting.
Market capitalization is determined by multiplying the total number of outstanding shares by the current price per share. The Nifty 50 consists of the 50 stocks with the highest market capitalization. If the total market capitalization of the top 50 stocks amounts to Rs. 50,000 Crores and the highest market capitalization of an individual stock (such as company XYZ) is Rs. 10,000 Crores, then XYZ stock will represent 20% (10,000/50,000) of the market capitalization-weighted index, and so forth.
On the other hand, the Equal Weight Index involves assigning equal weight to the top 50 stocks by market cap, for instance. This approach eliminates preferential exposure. In contrast, if the stock with the highest market cap or price experiences a significant decline, the Nifty 50 Index will suffer greater losses compared to the equal-weight index. The primary objective is to achieve equal diversification and minimize concentration risk.
Let us compare the sector distribution of both the Nifty 50 Index Vs the Nifty 50 Equal Weight Index. The below image is for the Nifty 50 Index.
The image below is for the Nifty 50 Equal Weight Index.
By looking at the above two images, you can easily compare that due to equal weightage in the Nifty 50 Equal Weight Index, sector dependency is reduced and gives us a wider diversification than the concentrated diversification of Nifty 50.
However, does it result in better risk-adjusted returns for the Nifty 50 Equal Weight Index over the Nifty 50 Index?
Nifty 50 Vs Nifty 50 Equal Weight Index – Which is better?
Let us now look into the past 25 years’ data of both indices and try to find the answers for this question. For this purpose, I am comparing the Total Return Index (TRI) data. The Nifty 50 TRI data is available from 30th June 1999. Hence, I have taken both the daily data from 30th June 1999. This means we have 6,216 daily data points to understand and arrive at the judgment.
Let us try to understand the movement assuming you have invested Rs.1 lakh in each index on 30th June 1999 and then what is the current value of the same.
By looking at the above chart, looks Nifty 50 Equal Weight Index looks better. However, let us try to understand the downward risk by the drawdown of this data.
Drawdown refers to the decline in the value of an investment or a fund from its peak to its trough over a specific period. It is used to measure the risk and volatility of an investment. For example, if a portfolio reaches a high of Rs.1,00,000 and then drops to Rs.80,000, the drawdown is Rs.20,000 or 20%.
Closely look at the drawdown history. You noticed that the Nifty 50 Equal Weight Index is less risky than the Nifty 50 Index. However, since years, you can see that the Nifty 50 Equal Weight Index has a bit higher % of drawdown than the Nifty 50 Index. However, the overall Nifty 50 Equal Weight Index is less volatile than the Nifty 50 due to its better diversification.
Let us now analyze the performance of both indices by comparing the rolling returns and rolling risk.
# Nifty 50 Vs Nifty 50 Equal Weight Index – 1 Year Rolling Returns and Rolling Risk
You can notice that Nifty 50 and Nifty 50 Equal Weight Index performed abruptly. However, around 58% of time the Nifty 50 Equal Weight Index outperformed the Nifty 50 Index.
Let us now look into the 1-year rolling risk annualized based on the monthly returns of both indices. This will give you more clarity about the volatility.
It is clearly visible that the Nifty 50 Equal Weight Index has an edge over the Nifty 50 in terms of volatility for 1-year rolling risk.
# Nifty 50 Vs Nifty 50 Equal Weight Index – 3 Years Rolling Returns and Rolling Risk
Let us now look into the 3-year rolling returns and rolling returns.
In terms of consistency, Nifty 50 Equal Weight Index outperformed the Nifty 50 for almost around 51%.
Notice that in terms of volatility, the Nifty 50 Equal Weight Index looks superior to the Nifty 50 Index.
# Nifty 50 Vs Nifty 50 Equal Weight Index – 5 Years Rolling Returns and Rolling Risk
For 5 years rolling returns, the Nifty 50 Equal Weight Index outperformed the Nifty 50 for almost around 53% of the time.
Here also you can see that the Nifty 50 Equal Weight Index is less volatile than the Nifty 50 Index.
# Nifty 50 Vs Nifty 50 Equal Weight Index – 10 Years Rolling Returns and Rolling Risk
In the case of 10 years of rolling returns, the Nifty 50 Equal Weight Index outperformed the Nifty almost around 52% of the time.
Notice that the Nifty 50 Equal Weight Index is obliviously less risky than the Nifty 50 Index.
Conclusion – By looking at all the data, you can easily conclude that even though the risk will reduce in the Nifty 50 Equal Weight Index, on average, for all the above rolling returns period, it actually underperformed the Nifty 50 for almost around 50% of the times. Hence, if you are looking for less returns with lower risk, then you can explore the Nifty 50 Equal Weight Index. Otherwise, simply Nifty 50 is enough for you.
Refer our earlier posts on Nifty Indices –
