Do Nifty Next 50 Index funds make sense?

This year alone, two fund houses Navi Mutual Fund and Axis Mutual Fund, have lined up these passive investing schemes that look to leverage the potential of the companies that are expected to form the next generation of market leaders.

“The whole premise for the Nifty Next 50 is that these are the next large-cap companies that you will see becoming part of the mainline indices, and usually, these are the companies that are available at a much better valuation,” said Munish Randev, founder, Cervin Family Office.

Data shows that out of the 75 stocks that have graduated to the Nifty 50 Index in the last 19 years, 51 have been from the Nifty Next 50 Index.

In terms of structure, the top five constituents of the Nifty Next 50 index are Apollo Hospitals Enterprise Ltd. (4.71%), Avenue Supermarts Ltd. (4.27%), Adani Enterprises Ltd. (3.76%), Info Edge (India) Ltd. (3.69%), and Vedanta Ltd. (3.62%).

Further, the Nifty Next 50 is well diversified with financial services having the biggest weightage at 19.07%, followed by consumer goods (16.91%), metals (10.97%), consumer services (10.25%), and pharma (7.91%).

Compared to this, the financial services sector has the highest weightage in the Nifty 50 at 36.94%, meaning the performance of this heavyweight index is highly dependent on one particular sector.

On the outlook, experts believe that the Nifty Next 50 might have an edge over the traditional Nifty 50. “In a polarized market, like we’ve been seeing around for some time, the Nifty 50 is a much better option over the Nifty Next 50. However, I believe that markets are probably going to be slightly more non-polarized going forward. So, the Nifty Next 50 index can be looked at if fits somebody’s asset allocation,” said Kirtan Shah, founder and chief executive officer, Credence Wealth Advisors.

However, despite advantages, the Nifty Next 50 index can go through phases of underperformance.

Data shows that the Nifty Next 50 index failed to beat returns delivered by the Nifty 50 index during calendar years 2018, 2019 and 2020.

View Full Image

“When the market goes through a boom cycle, wherein the money is narrowly focused on just 10-15 stocks, then there the mainline indices tend to perform better than Nifty Next 50 index,” said Randev.

As per the expert, investors putting money on the Nifty 100 index would be better off with splitting allocation between a Nifty Next 50 index fund and a Nifty 50 fund.

“The top 100 as a large-cap category is a space that most of the advisors suggest because it is much safer from the long-term perspective. However, the Nifty Next 50 index, either standalone or combined with a Nifty50 index, will help provide a more well balanced and future focused exposure,” said Randev.

Investors should keep in mind that any investment be it in a Nifty 50 fund or Nifty Next 50 scheme should be as per their risk profile, asset allocation and investment requirement.