Are Equal Weight index funds safer?

With inputs from Aarati Krishnan

As investors, we’ve often been told that, to reduce risk, you need to own a less concentrated portfolio. We’ve been hearing a lot about the “Mag 7” stocks making up more than a third of the US S&P 500 index, making the index heavily dependent on just a few companies. It was this idea which gave birth to equal weight index funds, funds that take an index and invest in each of its stocks in equal proportions.

In a rising market, a few stocks often race ahead of others to gain a large market-cap share in the indices. An equal weight index is designed to mitigate the risk of concentration in such stocks by regularly trimming the weights of stocks that have run up. But does this approach really reduce downside when markets fall? Do equal weight indices outperform market-cap weighted indices over time? Our analysis below throws up counter-intuitive results. 

What’s equal weight? 

In India, the bellwether indices assign weights to stocks in proportion to their market capitalization (usually free-float market cap). Such indices review their constituents periodically but allow the weight of each company to rise or fall in line with changes in its stock price.

An equal weight index, however, is rebalanced periodically so that all stocks carry the same weight. For example, the Nifty 50 is reviewed twice a year (March and September). The Nifty 50 Equal Weight Index uses the same constituents as the Nifty 50 but rebalances each stock to 2% once every quarter (March, June, September, and December). Similarly, the Nifty 100 Equal Weight Index draws from the Nifty 100 and resets each stock to 1% weight every quarter. The Nifty 500 Equal Weight Index gives each stock a weight of 0.2%.

There are also two equal weight indices that do not include all the stocks of their parent index: the Nifty Top 10 Equal Weight Index and the Nifty Top 20 Equal Weight Index. Both draw their constituents from the Nifty 50 but include only the top 10 and top 20 stocks, respectively, based on average free-float market capitalization over the past six months (reviewed in March and September, along with the Nifty 50). Like other equal weight indices, they are rebalanced quarterly. The Nifty Top 10 gives each stock a 10% weight, while the Nifty Top 20 allocates 5% per stock.

How do they perform?

To check the performance of equal weight indices, we compared their long-term rolling returns with those of their parent indices and with comparable active funds.

Equal weight indices vs parent indices

We analyzed five equal weight indices against three parent indices over 1-year, 3-year, and 5-year rolling returns across the past 10 years. Here Nifty Top 10, Top 20 and Nifty50 Equal weight are compared to the normal Nifty 50. Nifty 100Equal Weight and Nifty500 Equal Weight are compared to their own market weighted parent indices. 

The Nifty 500 Equal Weight Index managed to beat its parent index on both average and maximum returns. This outperformance was consistent across time periods. However, rather than delivering these returns with lower downside, the Equal Weight index actually suffered higher losses than the market-cap weighted index in its worst periods. The above numbers show that the equal weight index  came with higher risk: its minimum returns were worse, and its volatility (measured by standard deviation) was higher compared to the Nifty 500.

The edge that the equal weight index had on returns also faded  over longer horizons. The average 5-year rolling return of the Nifty 500 Equal Weight Index is only 0.64% higher than that of the Nifty 500. Another point worth noting is that the equal weight index’s median return was lower than both its own average and the Nifty 500’s median. This suggests that its returns were more widely distributed, adding another layer of risk.

The percentage of instances when the Nifty 500 Equal Weight outperformed the Nifty 500 weakens as you stretch the holding period.  In 5-year rolling returns, it beat the parent index just over half the time (51.76%), compared to a stronger show of over 60% in the 1-year and 3-year periods.

The simplest explanation for the above performance  lies in their market-cap allocations. Both indices include the same set of stocks, but the Nifty 500 is market-cap weighted and therefore more heavily weighted in large-cap stocks.  As of August 2025, its allocation stood at 71.15% in large caps, 18.74% in midcaps, and 9.87% in small caps.

In contrast, the Nifty 500 Equal Weight’s allocation is driven equally by all market cap segments.  Since it includes 250 small caps, 150 midcaps, and 100 large caps, its allocation resets at 20%, 30%, and 50% in large, mid, and small caps, respectively, at each rebalance. This divergence explains the performance differences. In sideways or down markets, when mid and small caps tend to lag large caps, the Nifty 500 outperforms. The 2018–2020 period was one such phase. Conversely, in rallies, when mid and small caps run ahead  the Nifty 500 Equal Weight pulls ahead, as seen after COVID.

The Nifty 100 Equal Weight index shows a similar pattern to the Nifty 500 Equal Weight. It scores better on return metrics but worse on risk. The outperformance also fades over longer horizons. In 5-year rolling returns, the Nifty 100 Equal Weight delivered only 0.06% higher average returns than the parent Nifty 100. Its 1-year median return was lower than both its own average and the parent’s median, indicating an unfavourable distribution of returns. Outperformance also narrowed over time. The index beat the parent in only 51.88% of 5-year rolling return instances, compared to 56% and 64.73% over the 1-year and 3-year periods.

For the Nifty 100 Equal Weight Index, mid or small-caps cannot be blamed for dragging down returns in hostile markets because  the index is all large caps. But  the Nifty 100 Equal Weight showed a similar pattern to broader Nifty 500.  The parent Nifty 100 held up better in sideways markets, while the equal weight version rallied more in bull markets. This again ties back to market cap. As of September 10, 2025, the weighted average market cap of the Nifty 100 was Rs.6.46 lakh crore, compared with Rs.2.65 lakh crore for the Equal Weight. The heavier tilt toward giant-caps is likely to be aiding the market cap weighted index fare better in dicey markets. 

The Nifty 50 Equal Weight index was not even as successful as the Nifty 100 or Nifty 500 Equal Weight versions in containing risk.  It showed only mild outperformance in 1-year rolling returns, which flattened in the 3-year period and reversed in the 5-year horizon. Over 5 years, the index trailed the parent Nifty 50 by 0.53% in average returns. In addition, it recorded lower minimum returns and higher volatility (standard deviation) than the parent

The Nifty 50 Equal Weight also rallied ahead of the main index in bull markets but lagged otherwise. Its weighted average market cap was Rs.3.78 lakh crore versus Rs.6.62 lakh crore for the parent Nifty 50 (as of September 10, 2025). This exercise points to the fact that stocks need not change their properties suddenly at the cutoff for large-caps, mid-caps or small-caps. But clearly, as we move from stocks with larger market cap down the line, stocks turn riskier in terms of higher volatility and susceptibility to market falls. 

The above exercise clearly tells us that owning all the stocks in a portfolio but simply equal-weighting them does not materially improve your investment results or contain risks. This is perhaps why the fund industry came up with  two equal weight indices containing only the top stocks in the Nifty 50  – the Nifty Top 10 Equal Weight and Nifty Top 20 Equal Weight index. 

The Nifty Top 20 Equal Weight displayed almost the opposite pattern of the Nifty 50 Equal Weight. It underperformed the Nifty 50 in 1-year returns but outperformed over 5-year returns, while keeping its minimum return and volatility measures between those of the parent and the Nifty 50 Equal Weight. In terms of frequency of outperformance, it crossed the halfway mark with 51.56%, 54.38%, and 54.1% in 1-year, 3-year, and 5-year rolling returns, respectively.

It, however, stayed closer to the parent Nifty 50 compared to other pairs we analyzed. Its risk and return numbers hovered near those of the parent, and its outperformance frequency remained around 50%. Its weighted average market cap was Rs.6.3 lakh crore, nearly identical to the Nifty 50’s Rs.6.62 lakh crore.

The Nifty Top 10 Equal Weight, despite being the least diversified, delivered stronger results. Its risk metrics were on par with or even better than the parent index. Over 5-year rolling returns, it outperformed both the parent and the other equal weight indices on nearly all risk and return measures, except maximum returns. Its average return exceeded the Nifty 50’s by a solid 2.05%. It even managed to beat the parent index in 83.52% of 5-year rolling return instances.

The index limits itself to the largest companies but takes on concentration risk with 10% weights in all its stocks. Over the long term, it not only beat its parent but also outperformed broad indices that also includes allocation to mid and small caps. Its divergence from the Nifty 50 was significant: maximum 1-year outperformance exceeded 18%, while maximum underperformance was -12%. These deviations were higher than that for Nifty Top 20 Equal Weight Index at 9% and -6.56%.

As expected, the Nifty Top 10 Equal Weight had the highest weighted average market cap, Rs.8.24 lakh crore versus Rs.6.62 lakh crore for the Nifty 50 (September 10, 2025). Interestingly, it tended to outperform in bear markets but the pattern was less clear with bull runs. In the post-COVID rally it tracked the parent index closely, but in the next bull market starting mid-2022 it underperformed sharply.

With just 10 stocks, outcomes depend heavily on how individual stocks move relative to the rest of the Nifty 50. For instance, Reliance stagnated for nearly a decade before surging 5x, while HDFC Bank consistently beat markets for more than a decade before going flat even as markets doubled. Such stock-level stories can disproportionately influence the Top 10 Equal Weight index.

As of August 2025, the top three Nifty 50 stocks: HDFC Bank (13.1%), ICICI Bank (9%), and Reliance (8.3%) had a 30% weight on Nifty 50, this is close to their collective weight Nifty Top 10 Equal Weight Index as well. These 3 stocks made up most of the 52.4% overlap Between Nifty 50 and Nifty Top 10 Equal Weight.

The weights of individual Nifty 50 stocks are sub 5% from the fourth stock onward. The stocks with the most weight difference in allocation between Nifty Top 10 Equal Weight and the Nifty 50 includes Axis Bank (9.2% vs 2.7%), Kotak Bank (9.5% vs 2.6%), and L&T (10.6% vs 3.8%). Any future potential deviance between Nifty 50 and Nifty Top 10 Equal weight is likely to be caused by these ‘bottom-end’ constituents of the Top 10 Nifty companies.

Ultimately, the Nifty Top 10 Equal Weight’s performance is less about broad market-cap dynamics and more about which  specific large-cap stocks make it to the top 10  at every bi-annual review. 

Takeaways 

The above analysis has takeaways both for mutual fund and direct stock investors. 

• Equal weighting the constituents of an index doesn’t lead to lower losses in a falling market or a better show in a sideways market. Yes, it can lead to better returns in rallies. But this effect fades over longer holding periods such as 5 years. Equity investors are anyway expected to stay the course for 5 years plus. 
• Equal weight indices do seem to deliver better results in bull phases. But then investors cannot be expected to know when a bull phase will arrive in advance and position themselves in equal weight indices. Should bear markets arrive unannounced, equal weight strategies seem to take a bigger knock. A possible exception is the Nifty Top 10 Equal Weight, which mostly beat its parent index before COVID but has lost some momentum since.
• Tracking error is another factor to watch.  By design, equal weight indices require more frequent rebalancing, which increases transaction needs and the risk of tracking error. The broader the index, with more constituents, the greater this risk. Since most equal weight index funds were launched only recently, long-term tracking error data is limited. Among the oldest, the Sundaram Nifty 100 Equal Weight Fund – Direct Plan has delivered a 10-year CAGR of 13% as of September 16, 2025, lower than the 14.22% return of the Nifty 100 Equal Weight TRI. Another fund, DSP Nifty 50 Equal Weight Index Fund – Direct Plan has a 5-year CAGR of 22.89%, slightly below the 23.5% return of the Nifty 50 Equal Weight TRI.
• The underwhelming performance of equal weighted indices also has lessons for direct stock investors. The decision on position-sizing – how much of your portfolio you will hold in each stock is absolutely critical to your final returns. If you take the lazy way out and stick to equal weights, this can act as a drag on your portfolio. This could also be because with their frequent rebalancing, equal weight strategies often force investors to do what Peter Lynch warned about – Cutting the flowers and watering the weeds – selling your winners and accumulating more of the losers in an effort to maintain weights.  

• For investors, active funds remain the better route to generate index-beating returns with lower risk. Well-performing active funds have not only beaten the index but also provided downside protection, unlike equal weight indices, which tend to lag during market downturns.