Should you invest in Nifty Next 50 Index funds?

AP

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Over the past year, at least five asset management companies (AMCs) have launched schemes based on the Nifty Next 50 Index, which tracks the performance of 50 companies from the constituents of the Nifty 100 Index after excluding the constituents of the Nifty 50 Index.

“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 past 19 years, 51 have been from the Nifty Next 50 Index.

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 the 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 it 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. The Nifty Next 50 Index has failed to beat returns delivered by the Nifty 50 Index during calendar years 2018, 2019 and 2020.

“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.

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.

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