Mutual Funds

Why Nifty Next 50 index funds are the next big thing

Vivek Ananth | Updated on February 29, 2020

Nifty Next 50 stocks are more evenly distributed across sectors than Nifty 50 ones

Passive investing through index funds and exchange-traded funds (ETFs) have been on the rise over the past few years as many actively managed funds have underperformed their benchmarks.

Many investors have been investing in index funds and ETFs that track the Nifty 50 index or the Sensex 30 to have an exposure to large-cap stocks.

However, there is another index, though very volatile, some investors have taken to — NSE’s Nifty Next 50 or Nifty Junior. BSE has a similar index, the Sensex Next 50. The 50 stocks in the Nifty Next 50 and the Sensex Next 50 come after the top 50 stocks (Nifty 50 and Sensex 50) in terms of capitalisation.

The Nifty 50 represents 67 per cent of the free float capitalisation of the stocks listed on NSE.

Nearly 41 per cent of of the market cap of the the index is made up of banks and NBFCs.

This makes it a little skewed towards one sector.

The Nifty Next 50 is more evenly distributed across different sectors. It makes up 10 per cent of the free float market capitalisation of the stocks listed on the NSE. In terms of sectors, the Nifty Next 50 is dominated by financial services companies, including asset management and insurance companies (31 per cent in terms of market capitalisation), and consumer goods companies (26 per cent).

In all, there are 13 index funds and ETFs (five index funds and eight ETFs) that track the Nifty Next 50 and the Sensex Next 50.

These include DSP Nifty Next 50 Index Fund, ICICI Prudential Nifty Next 50 Index Fund, IDBI Nifty Junior Index Fund, Motilal Oswal Nifty Next 50 Index Fund, UTI Nifty Next 50 Index Fund, Aditya Birla Sun Life Nifty Next 50 ETF and ICICI Prudential Nifty Next 50 ETF.

How they fared

There are two factors — returns and tracking errors — that one must pay attention to while picking the right index fund or ETF.

The Nifty 50’s compounded annual returns in the past one-, three- and five-year periods were 9.7 per cent, 11.1 per cent and 7.5 per cent, respectively. The Nifty Next 50’s compounded annual returns for the same periods were 7.6 per cent, 6.0 per cent, 8.9 per cent, respectively.

Tracking error is the divergence of a fund from its underlying index. This could be caused by the expense ratio of the fund, among other factors.

The fund with the least tracking error vis-à-vis its underlying index is the most suitable option.

If we look at the funds that invest in the underlying stocks of the Nifty Next 50 (and the Sensex Next 50), out of the 13 funds in the market, SBI ETF Nifty Next 50 has the smallest tracking error of 0.01 followed by UTI Nifty Next 50 Index Fund and UTI Nifty Next 50 ETF, both of which have a tracking error of 0.02.

Published on February 29, 2020

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