Between the Nifty 50 Vs Nifty 50 Equal Weight Index, which is a greater Index for risk-adjusted returns? Allow us to attempt to perceive with 25 years of previous knowledge.
The Nifty 50 Equal Weight Index consists of the 50 shares with the best market capitalization, all having equal illustration within the index. However, the broadly used Nifty 50 relies on market capitalization publicity. This text explores the results of equal weighting.
Market capitalization is set by multiplying the whole variety of excellent shares by the present worth per share. The Nifty 50 consists of the 50 shares with the best market capitalization. If the whole market capitalization of the highest 50 shares quantities to Rs. 50,000 Crores and the best market capitalization of a person inventory (reminiscent of firm XYZ) is Rs. 10,000 Crores, then XYZ inventory will characterize 20% (10,000/50,000) of the market capitalization-weighted index, and so forth.
However, the Equal Weight Index entails assigning equal weight to the highest 50 shares by market cap, as an illustration. This strategy eliminates preferential publicity. In distinction, if the inventory with the best market cap or worth experiences a major decline, the Nifty 50 Index will endure larger losses in comparison with the equal-weight index. The first goal is to realize equal diversification and decrease focus threat.
Allow us to examine the sector distribution of each the Nifty 50 Index Vs the Nifty 50 Equal Weight Index. The under picture is for the Nifty 50 Index.
The picture under is for the Nifty 50 Equal Weight Index.
By wanting on the above two photos, you’ll be able to simply examine that resulting from equal weightage within the Nifty 50 Equal Weight Index, sector dependency is decreased and offers us a wider diversification than the concentrated diversification of Nifty 50.
Nonetheless, does it lead to higher 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 healthier?
Allow us to now look into the previous 25 years’ knowledge of each indices and attempt to discover the solutions for this query. For this function, I’m evaluating the Whole Return Index (TRI) knowledge. The Nifty 50 TRI knowledge is out there from thirtieth June 1999. Therefore, I’ve taken each the every day knowledge from thirtieth June 1999. This implies we’ve 6,216 every day knowledge factors to know and arrive on the judgment.
Allow us to attempt to perceive the motion assuming you might have invested Rs.1 lakh in every index on thirtieth June 1999 after which what’s the present worth of the identical.
By wanting on the above chart, seems to be Nifty 50 Equal Weight Index seems to be higher. Nonetheless, allow us to attempt to perceive the downward threat by the drawdown of this knowledge.
Drawdown refers back to the decline within the worth of an funding or a fund from its peak to its trough over a particular interval. It’s used to measure the danger and volatility of an funding. For instance, if a portfolio reaches a excessive of Rs.1,00,000 after which drops to Rs.80,000, the drawdown is Rs.20,000 or 20%.
Intently have a look at the drawdown historical past. You observed that the Nifty 50 Equal Weight Index is much less dangerous than the Nifty 50 Index. Nonetheless, since years, you’ll be able to see that the Nifty 50 Equal Weight Index has a bit larger % of drawdown than the Nifty 50 Index. Nonetheless, the general Nifty 50 Equal Weight Index is much less unstable than the Nifty 50 resulting from its higher diversification.
Allow us to now analyze the efficiency of each indices by evaluating the rolling returns and rolling threat.
# Nifty 50 Vs Nifty 50 Equal Weight Index – 1 Yr Rolling Returns and Rolling Threat
You possibly can discover that Nifty 50 and Nifty 50 Equal Weight Index carried out abruptly. Nonetheless, round 58% of time the Nifty 50 Equal Weight Index outperformed the Nifty 50 Index.
Allow us to now look into the 1-year rolling threat annualized based mostly on the month-to-month returns of each indices. This will provide you with extra readability in regards to the volatility.
It’s clearly seen that the Nifty 50 Equal Weight Index has an edge over the Nifty 50 when it comes to volatility for 1-year rolling threat.
# Nifty 50 Vs Nifty 50 Equal Weight Index – 3 Years Rolling Returns and Rolling Threat
Allow us to now look into the 3-year rolling returns and rolling returns.
When it comes to consistency, Nifty 50 Equal Weight Index outperformed the Nifty 50 for nearly round 51%.
Discover that when it comes to volatility, the Nifty 50 Equal Weight Index seems to be superior to the Nifty 50 Index.
# Nifty 50 Vs Nifty 50 Equal Weight Index – 5 Years Rolling Returns and Rolling Threat
For five years rolling returns, the Nifty 50 Equal Weight Index outperformed the Nifty 50 for nearly round 53% of the time.
Right here additionally you’ll be able to see that the Nifty 50 Equal Weight Index is much less unstable than the Nifty 50 Index.
# Nifty 50 Vs Nifty 50 Equal Weight Index – 10 Years Rolling Returns and Rolling Threat
Within the case of 10 years of rolling returns, the Nifty 50 Equal Weight Index outperformed the Nifty virtually round 52% of the time.
Discover that the Nifty 50 Equal Weight Index is obliviously much less dangerous than the Nifty 50 Index.
Conclusion – By all the information, you’ll be able to simply conclude that regardless that the danger will scale back within the Nifty 50 Equal Weight Index, on common, for all of the above rolling returns interval, it truly underperformed the Nifty 50 for nearly round 50% of the occasions. Therefore, in case you are on the lookout for much less returns with decrease threat, then you’ll be able to discover the Nifty 50 Equal Weight Index. In any other case, merely Nifty 50 is sufficient for you.
Refer our earlier posts on Nifty Indices –
