Betting On The Right Index Fund

The leading equity indices underwent a notable downturn last week, largely due to a substantial 15 per cent decline in HDFC Bank following its earnings announcement. This decline significantly impacted the frontline index, which fell over two per cent, despite favourable global market trends. This situation underscores an important consideration for investors, especially those who invest in index funds. Most market cap-weighted index funds may have experienced a similar downturn. However, equal-weighted index funds could offer some relief, showing a decrease of only 1.2 per cent during the same period. 

Historically, equal-weighted indices have outperformed market-weighted counterparts. For instance, the Nifty 50 Equal Weight Index has delivered a consistent 15.3 per cent annualised return since 1999, surpassing the Nifty 50's 13.5 per cent. Despite occasional periods of lagging, such as the past five years, the performance gap hasn't been significant. The secret of such outperformance lies in diversification and resilience, as equal-weighted indices provide each company with an equitable opportunity. This approach mitigates reliance on a few giants, fostering risk spread and accessing the potential of emerging companies beyond the market leaders. Hence, next time when you go for a passively managed index fund you can consider an equal-weighted index fund before making a final investment commitment. 

In one of our featured articles, we explore the critical differences between actively and passively managed funds, emphasizing the importance for investors to thoroughly assess their risk-return preferences before choosing either investment strategy. As we enter the final quarter of the financial year, focus inevitably turns towards options for tax-saving investments. Our cover story highlights five leading Equity-Linked Savings Schemes (ELSS), providing investors with potential opportunities for tax deductions of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. Given the prevailing market volatility, our analysis suggests a preference for the Systematic Investment Plan (SIP) approach for investing in these schemes. 

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Shashikant Singh
Executive Editor