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Following the implementation of SEBI’s re-categorisation of mutual fund schemes, asset management companies have started launching new fund offers (NFOs) based on the new guidelines. Fund houses have begun to diversify their products to serve the varied needs of different investors, and enter into untapped categories and unique ideas as well.
Index funds, which are passive products, are making an entry once again. Indian investors rarely invest in passive mutual funds and prefer the alpha that active schemes deliver. There are about 22 index-based mutual fund schemes that replicate indices such as the Nifty, Sensex, Nifty 100, Nifty Junior and Nifty Next 50.
Index funds mostly deliver returns that are in line with their respective benchmark indices. Nifty Next 50 index has delivered superior returns over the long term (over five and 10 years) compared with Nifty and Sensex returns. Nifty Next 50 TRI has clocked 21.9 per cent and 16 per cent over five and 10 years, respectively, while Nifty TRI and Sensex TRI have given 15 per cent and 10.4 per cent in these time periods. Although Nifty Next 50 has slipped in performance over the one-year period, over the long run, it has delivered better returns than mid- and small-caps.
UTI Mutual Fund has announced the launch of UTI Nifty Next 50 Index Fund, an open-ended scheme that would replicate/track Nifty Next 50 index. It is a scheme that carries moderate risks. The NFO opened on June 8, and closes on June 22.
Why Nifty Next 50?
First, the index has outperformed other indices in the long run and has delivered 16 per cent annualised returns over the past 10 years. Second, the index represents the performance of the ‘next’ 50 companies, or stocks that come after the top 50 stocks in the order of free float market capitalisation, and are relatively well-known quality large-caps. Third, the index also represents potential candidates for inclusion in Nifty 50 in the future. For instance, Eicher Motors, YES Bank, Titan Company and Bajaj Finserv have moved into Nifty 50 from the Nifty Next 50 basket over the last three years.
Some of the top stocks in Nifty Next 50 index are JSW Steel, Britannia Industries, Motherson Sumi Systems, Godrej Consumer Products and Ashok Leyland. The sector exposure and weightage of Nifty Next 50 is completely different and more more diversified that of Nifty 50. The consumer goods sector has the highest weight of 24 per cent in the index, financial services has 18 per cent and automobile 12 per cent.
Investment strategy
Being a passive fund, there would be no chopping and changing in the holdings of the scheme. Nifty Next 50 itself presents a basket of stocks that would give investors a blend of growth and stable picks.
Some of the advantages of passive investing are: it reduces non-systematic risks, expense ratio is low compared with other active funds and frequent churn is avoided.
Peer performance
ICICI Pru Nifty Next 50 Index Fund was launched in June 2010. Though the fund marginally underperforms Nifty Next 50 TRI index, it has delivered stable returns of 20 per cent over the past five years.
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