ETFs have been receiving a lot of attention from investors in the past few years. Actively-managed large-cap funds have found it challenging to outperform their benchmark indices before-mentioned as the Nifty 50. This also led to many fund houses operating out fresh passive schemes based on different indices as well. But there is one index that attains out in terms of performance and its ultimate potential.
Enter Nifty Next 50, or the Nifty Junior index as it was beforehand called. Currently, there are 12 passively controlled Nifty Next 50 funds available in the market – six each of index funds and Exchange Traded Funds (ETFs). Their connected assets went up around three-fold over the last two years to Rs 4,393 crore.
Here are five reasons why you must own at most limited one passively-managed Nifty Next 50 system in your portfolio.
Nifty Next 50 beats large-cap and mid-cap indices
The Nifty Next 50 index pictures 50 companies from the NIFTY 100 index after eliminating the NIFTY 50 companies. Some companies eventually measure to being a part of the Nifty 50 index. Some Nifty Next 50 companies also get reduced to lower-rung indices.
That stated, the Nifty Next 50 has given impressive results, consistently. It not only does well against the Nifty 50 index but also correlates well to mid-cap indices. Over the last 10-year term, the Nifty Next 50 total returns index (TRI) presented 11.6 percent returns (combined). The Nifty 50 TRI contracted 9.9 percent.
Based on a rolling return, too, the Nifty Next 50 scores over the Nifty 50 as strong as the Nifty Midcap 150 (TRI). We studied the indices’ five-year returns over a total period of 15 years.
Diversification, with a midcap flavor
The Nifty Next 50 is typically a better-diversified record than the Nifty 50. Anil Ghelani, Head of Passive Investments & Products at DSP Investment Managers states that Nifty 50 often sees some of its best holdings crossing 10 percent each. Nifty Next 50, on the other hand, typically doesn’t see its most extensive holdings cross even 5 percent. “The top 10 holdings in the Nifty Next 50 index are typically approximately 35-40 percent; in the case of Nifty 50, they are about 60 percent,” says Ghelani.
So, in contrast, the Nifty Next 50 Index is likewise diversified, with less application risk across stocks and sectors. The Nifty Next 50 often has a few mid-cap assets as well, which typically make up 8-10 percent of the portfolio.”
Defensive in characteristics
The sector structure of Nifty Next 50 also offers great diversification to your Nifty 50 based passively-managed schemes.
A look at Nifty Next 50 index shows us that its top holdings are in growth-styled companies in typically guarded sectors. The total weight of consumer non-durables, pharmaceutical, and other utilities sectors is about 46 percent as of November 2020. In the Nifty 50 index, the weightage for these divisions is only around 15 percent.
This improved Nifty Next 50 index exceed the Nifty 50 in most of the secular bull-run years between 2014 and 2017. However, the cyclical weighty Nifty 50 (around 52 percent) helped it to produce a higher return than Nifty Next 50 in the polarized markets seen in 2018 and 2019.
As far as the sectoral organizations are concerned, they complement each other. Therefore, both Nifty 50 and Nifty Next 50 funds can be part of one's portfolio.
The incubator of the Nifty 50
‘The Nifty Next 50 is an incubator for Nifty 50. Whenever innovative companies enter into Nifty 50 case, they are selected from the Nifty Next 50” states Vishal Jain. DSP’s Ghelani figures that in the last 20 years, 44 stocks have gone from Nifty Next 50 to Nifty 50. This is also why Nifty Next 50 is typically regarded as a set of ‘tomorrow’s bluechip companies.’
Nifty 100 versus a mixture of Nifty 50 and Nifty Next 50
Although the Nifty 100 index consists of all properties that are in the two indices – Nifty 50 and Nifty Next 50 – it’s not as easy as it looks. Around 87 percent of Nifty 100 lies in Nifty 50 stocks, and just 13 percent lies in the Nifty Next 50 elements, as of November 2020.
“While optically one might think that it would be sufficient to have only one (Nifty 100) rather than owning two funds, but realistically, the risk and return expectations would be very complex,” says Ghelani who advises a mix of Nifty 50 and Nifty Next 50 indices.
Index funds or ETFs with more moderate tracking error and expense ratio are favored investment options. Additionally, more importantly, liquidity matters if you want to invest in ETFs within secondary markets. The minimum property horizon should be five years or more.