Equal-weighted vs market cap-weighted index fund: Which is better?

With many experts claiming equal-weighted index funds to change the face of passive investing in India, we decided to do some number-crunching to get to the bottom of the matter. We compared them with their direct rival - market cap-weighted index - to see if there is any substance in their claims. Now, if terms like 'equal-weighted' and 'market cap-weighted' sound Greek to you, worry not because we'll quickly explain what they are before proceeding. Brief background Let's say you want to invest in the Nifty index, home to 50 of the largest stocks in the country. If you invested in a market cap-weighted index fund... A greater percentage of your money would be invested in the larger Nifty stocks. For instance, if Reliance Industries comprises 10 per cent of the Nifty index, the same percentage of your money will be invested in that stock. Similarly, if a stock has 0.2 per cent weight in the Nifty, only that proportion of the money would be invested in that particular stock. If you invested in an equal-weighted index fund... An equal percentage of money would be invested in each of the stocks present in the index. In your case, 2 per cent of the money would be invested in each of the 50 stocks present in the Nifty. Now that we understand the difference, let's look at their long-term performance. 5-year performance Assuming we create a mutual fund that replicate these two indices. The market cap-weighted index delivered higher returns, though with slightly higher volatility