Nifty Next 50 index funds have gotten popular over the last few years. As expected, the index caught the fancy of investors on the back of strong performance from 2014 until 2017. However, not many investors benefited from this because there were not many index fund options to invest in this index. Not that the funds would have attracted money because the AUM chases the performance.
ICICI Nifty Next 50 fund has been around since 2010 and is currently only ~ Rs 700 crores in AUM. Even the bulk of this AUM has come only in the last couple of years.
The second oldest index fund, UTI Nifty Next 50 was launched in June 2018 and the AUM is about ~500 crores. Nippon India ETF Junior BeES has been around since 2003 (over 15 years) but it’s AUM is still around ~1,000 crores. Same story. The second oldest ETF, SBI Nifty Next 50 has been around since March, 2015 and the current AUM is about Rs 438 crores.
Therefore, the AUMs are small and even these AUMs have come only recently. Unfortunately, the Nifty Next 50 index has not done well over the past couple of years and the investor experience (for most investors) is unlikely to be good.
Since we are talking about index funds, it will be interesting to compare the performance of Nifty Next 50 with Nifty 50 index (the bellwether index for the Indian equity markets).
What are Nifty 50 and Nifty Next 50 indices?
Nifty 50 comprises of the top 50 companies by market capitalization.
Nifty 100 comprises of the top 100 companies by market capitalization.
Nifty Next 50 is Nifty 100-Nifty 50 i.e. the companies from 51st to 100th rank by market capitalization.
By the way, it is not exactly what I mentioned. You can look at the index constitution methodology on this website. However, the description I used gives a fair idea.
Note that these indices are market cap weighted indices. Hence, a bigger company gets a higher weightage in the index.
In the business news channels and dailies, you will find frequent reference to Nifty 50 and Sensex. Their performance is an indicator of the mood of the market. Nifty Next 50 is not that popular.
Performance Comparison: Nifty 50 vs Nifty Next 50
Let’s compare the performance of Nifty 50 and Nifty Next 50 since 2002.
I will just present the charts and leave the conclusion to you.
We will start with point-to-point returns. Will compare the Total Return Indices. Total Return Indices consider the reinvestment of dividends (Price Indices do not consider the impact of dividends).
Nifty Next 50 has done much better than Nifty 50. CAGR of 19.42% p.a. vs 15.42% p.a. for Nifty 50.
We know that point-to-point returns are not the best way to compare performance. Therefore, let’s look at the rolling returns. I plot the charts for 1-year, 3-year, 5-year, and 7-year rolling returns.
What about the volatility of the two indices?
Nifty Next 50 has done better in terms of returns. However, we can also see from the charts above that Nifty 50 is less volatile compared to Next 50.
Let’s look at the rolling risk.
My statistics concepts are not up to the mark. I hope my data usage and conclusion is correct.
What if we use a mix of Nifty 50 and Nifty Next 50?
I also used a mix of Nifty 50 and Nifty Next 50 TRI and see if it added value. I didn’t expect much since the correlation of Nifty 50 and Nifty Next 50 is will be quite high. The results in the following chart attest to my thoughts. I considered a wrap product that invested 50% each in Nifty 50 and Nifty Next 50 TRI and rebalanced to 50:50 allocation on Jan 1 every year. You get about the average of the two. I didn’t consider the volatility for this mix.
To be honest, the chart above is a bit misleading. I have used the arithmetic average to calculate rolling returns. A few years of good performance (above 100% returns) has skewed the returns at least for the shorter horizon. Do not expect such high returns on a consistent basis. I think the geometric average should have a better choice.
What is the conclusion?
Should you leave Nifty 50 and invest in Nifty Next 50 instead? Or should I use a mix of Nifty 50 and Next 50?
I leave this to your judgement.
Do note that past performance may not repeat. We can see that Nifty Next 50 has done much better compared to Nifty 50. However, there is no guarantee that this will repeat.
Don’t just go by returns alone. Asset allocation should be the bedrock of your financial planning. I am quite sure we can improve even this performance by adding lower correlation assets (fixed income, gold, international equity) to the mix.
Points to Note
You can argue that comparing Nifty 50 and Nifty Next 50 indices is not right. Even though stocks in both the indices qualify as large-cap stock as per SEBI classification, the average size of a Nifty 50 stock is much larger than the average size of a Nifty Next 50 stock. Fair enough. I don’t deny it but it is still good to compare performance.
The higher returns of Nifty Next 50 has also come with higher volatility. Higher volatility can compromise investment discipline.
Please allow possibility of error in calculations for various charts.
This is not a recommendation to invest in Nifty Next 50 index funds. You must appreciate the risks involved before making any investments. If needed, seek professional assistance from a SEBI Registered Investment Adviser.
Over the past few months, we have tested various investment strategies or ideas and compared the performance against the Buy-and-Hold Nifty 50 portfolio. In some of the previous posts, we have:
- How to reduce losses in your portfolio?
- Which is the best date for SIP in mutual funds?
- Assessed whether adding an International Equity Fund and Gold to an Equity portfolio has improved returns and reduced volatility.
- Does Momentum Investing work in India?
- Does Low Volatility investing beat Nifty and Sensex?
- Performance Comparison: Investing on 52-week Lows vs Investing on 52-week Highs
- Nifty 200 Momentum 30 Index: Performance Review
- Nifty Factor Indices (Value, Momentum, Quality, Low Volatility, Alpha): Performance Comparison
- Nifty Alpha Low Volatility 30: Performance Review
- 50% Gold + 50% Equity: How does the portfolio perform?
- What is the Best Asset Allocation for your portfolio? 50:50, 60:40 or 70:30?
- Considered the data for the past 20 years to see if the Price-Earnings (PE) multiple tells us anything about the prospective returns. It does, or at least has in the past.
- Tested a momentum strategy to shift between Nifty 50 and a liquid fund and compared the performance against a simple 50:50 annual rebalanced portfolio of Nifty index fund and liquid fund.
- Used a Simple Moving Average Based Market Entry and Exit Strategy and compared the performance against Buy-and-Hold Nifty 50 over the last two decades.
- Compared the performance of Nifty 50 Equal Weight vs Nifty 50 over the last 20 years.
- Nothing works all the time. Used Nifty 50, Nifty MidCap 150, and Nifty Small Cap 250 index to demonstrate that sometimes intuitive investment choices do not work.
- Compared the performance of 2 popular balanced funds against a simple combination of an index fund and a liquid fund.
- Compared the performance of a popular dynamic asset allocation fund (Balanced advantage fund) against an equity index fund and see if it has been able to provide reasonable returns at low volatility.
- Does a portfolio of Banking, Pharma, and IT stocks perform better than Nifty 50?