Nifty Next 50 index: Large cap or Midcap fund?

Is Nifty Next 50 index a large cap or a midcap index?

Going by SEBI classification where top 100 stocks by market capitalization are considered large cap stocks, Nifty Next 50 is a large cap index. However, I believe its performance shares greater similarity with the midcap index (Nifty Midcap 150) than with the large cap index (Nifty 50).

Nifty Next 50: Large cap or Mid cap? How do we settle this?

We can look at the risk metrics and return performance of Nifty Next 50 and see whether the Nifty Next 50 behaves more like Nifty 50 or like Nifty Midcap 150 index.

For instance, if Nifty Next 50 rises and falls in tandem with Nifty Midcap 150 index AND has risk characteristics like Nifty Midcap index, then it behaves more like a midcap fund (despite being a large cap index as per SEBI classification).

Please understand all these indices (Nifty 50, Nifty Next 50 and Nifty Midcap 150) are built around domestic stocks and thus will show high level of correlation.

Nifty Next 50 Vs. Nifty 50 vs Nifty Midcap 150: What does the data tell us?

I compare the data of following 4 indices from April 1, 2005 until July 30, 2021.

1. Nifty 50 TRI (Top 50 stocks by market capitalization)
2. Nifty Next 50 TRI (Next 50 stocks. 51^st-100^th stock)
3. Nifty Midcap 150 TRI (Next 150 stocks. 101^st-250^th)
4. Nifty Small Cap 150 TRI (Next 250 stocks. 251^st-500th)

Let’s look at the CAGR first

Nifty 50 TRI: CAGR of 14.69% p.a.

Nifty Next 50 TRI: CAGR of 15.82% p.a.

Nifty Midcap 150 TRI: CAGR of 16.98% p.a.

Nifty Smallcap 250 TRI: CAGR of 15.96% p.a.

This does not tell us anything, does it?

Let’s look at the calendar year returns to get a sense of how these indices have behaved each year.

Nifty Next 50 Index: Calendar Year Returns

At the first glance, it seems Nifty Next 50 performance is closer to Nifty Midcap 150 compared to Nifty 50.

I checked the difference in calendar year performance of Nifty Next 50 with Nifty 50, Nifty Midcap 150 and Nifty Smallcap 250 indices.

For instance, in 2015, Nifty 50 gave -3%. Nifty Next 50 gave 8.1% and Nifty Midcap 150 returned 9.7%.

The corresponding values for 2015 in the following chart will be:

For Nifty 50 = 8.1% -(-3%) = 11.1%

For Nifty Midcap 150 = 8.1% – 9.7% = -1.6%

We can see that the difference between Nifty Next 50 and Nifty Midcap 150 is much lower than the difference between Nifty Next 50 and Nifty Midcap 150.

Nifty Next 50 Vs. Nifty 50 vs Nifty Midcap 150: What about rolling returns?

Rolling returns are a better way to assess return performance compared to Point-to-Point returns.

Additionally, if the plots for the two indices are closer, this means those two indices have performed similarly.

The area between the Nifty 50 and Nifty Next 50 has been highlighted in Grey.

The area between Nifty Next 50 and Nifty Midcap 150 has been highlighted in Pink.

And we see more grey than pink.

Thus, even on the rolling returns performance, Nifty Next 50 is much closer to Nifty Midcap 150 than to Nifty 50.

What about risk characteristics?

We will look at the rolling risk and maximum drawdowns.

Again, Nifty Next 50 is closer to Nifty Midcap 150 compared to Nifty 50.

Let’s look at correlation too

While all the correlation coefficients are high and expectedly so, the correlation between Nifty Next 50 and Nifty Midcap 150 is much higher.

And the final snapshot

This has important implications from portfolio construction perspective

From the risk and returns analysis shared above, it is easy to see that Nifty Next 50 index fund behaves more like a midcap fund (Nifty Midcap 150) than a large cap fund (Nifty 50).

While the analysis is fine, how do we use this information?

We add different kinds of funds to your domestic equity portfolios to get exposure to the entire market spectrum. Large cap, midcap, multicap, small cap etc. That increases the number of funds in the portfolio and adds to the portfolio complexity.

Now, we know that Nifty Next 50 index behaves more like a midcap fund.

Therefore, if you prefer simple portfolios, say just a couple of index funds, Nifty 50 index could be your large cap exposure and Nifty Next 50 fund could be a proxy for your midcap exposure. And that’s it. No need to other funds.

This is not to say that you shouldn’t use midcap funds in your portfolio. You can use mid and small cap funds too. And we can’t expect Nifty Next 50 to mirror the performance of midcap funds. Nifty Next 50 and Nifty Midcap 150 are not identical twins. If we look at the calendar year performance chart, the difference in annual returns is over 10% a few times. Moreover, that Nifty Next 50 is closer to Nifty Midcap 150 (than Nifty 50) does not make it a midcap fund.

However, if you are after simplicity, you can view Nifty Next 50 index fund in this new light and consider it as proxy for the midcap exposure in the portfolio.

Disclosure: I use more than a couple of index funds to structure equity portfolios. Additionally, my understanding of statistical concepts such as standard deviation/correlation is not upto the mark. However, I believe the charts shown give a fair idea.