Indian investors who want to diversify their portfolios and invest in top firms across several companies and industries sometimes choose the Nifty Next 50 Index Fund as an investment choice. Here, we examine the Nifty Next 50 Index Fund in detail, including its advantages, investment strategy, dangers, and a lot more.
What is the Nifty Next 50 Index Fund?
The Nifty Next 50 Index is a large-cap diversified index made up of 50 large-cap firms that are not included in the Nifty 50 Index. So, according to the free-float market capitalisation, which is calculated by multiplying the number of shares available for trading on the market by the share price, the companies ranked 51st to 100th make up the Nifty Next 50 Index.
The market value of shares that are free to float or are held by the general public rather than the company’s management, the promoters’ families, affiliated parties, or the government, is referred to as free float market capitalisation. In an Index based on free-float market capitalisation, the companies with the largest free-float market cap will have greater weights.
Another way to look at this index is to take into account all of the Nifty 100 Index’s companies while leaving out the Nifty 50 Index’s companies. These businesses are referred to as Next 50 because they might eventually join the Nifty 50 Index if their stock performs well.
The Nifty Next 50 Index Fund is designed to provide investors with exposure to mid-cap and small-cap companies while also offering diversification benefits.
Between 2020 and early 2022, some of the stocks that have been upgraded from the Nifty Next 50 Index to the Nifty 50 Index are Tata Consumer Products, SBI Life Insurance Company, Divi’s Laboratories, HDFC Life Insurance Company and Shree Cements.
What are the key highlights of the Nifty Next 50 Index Fund?
The Nifty Next 50 Index Fund has a maximum individual weight of 4.5% for any one stock. Investors’ exposure to the concentration risk associated with a single stock is significantly reduced by the cumulative weight of the top 10 stocks, which amounts to about 34% of the index.
Every two years, the Nifty Next 50 Index is rebalanced. New companies may be added to the index by replacing current companies twice a year on average free-float market cap calculations with cut-off dates of January 31 and July 31. A public notification is issued four weeks before the change takes effect when stocks are added to or removed from the index.
How to invest in the NIFTY Next 50 Index?
A simple and practical approach to investing is by selecting an index fund or Exchange Traded Fund (ETF) that tracks the Nifty Next 50 Index. ETFs, strive to minimise tracking errors — the differences between the performance of the index and the ETF — by replicating a benchmark index in their structure.
ETFs simply duplicate the performance of the index rather than trying to outperform it. The costs of ETFs are significantly lower than those of actively traded mutual fund schemes since they are passively managed. For a given performance level, lower costs will typically yield larger returns.
However, the drawback of getting exposure to Nifty Next 50 directly is that an investor’s gains and losses will track the Next 50 index. Therefore, it is impossible for an investor to outperform the index.
What are the benefits of Investing in the Nifty Next 50 Index Fund?
Diversification: By exposing investors to various businesses from various industries, the Nifty Next 50 Index Fund helps lower the investment portfolio’s overall risk.
Professional management: By investing in the Nifty Next 50 Index Fund, investors can take advantage of professional fund management, which eliminates the need for individual stock selection.
Low cost: As a passive investment vehicle, the Nifty Next 50 Index Fund has lower management fees than actively managed funds. The overall returns to investors are boosted as a result.
Convenience: For investors who need more time or knowledge to thoroughly examine individual stocks, investing in the Nifty Next 50 Index Fund is a convenient solution.
Access to growth companies: The Nifty Next 50 Index Fund provides investors exposure to fast-growing companies that have the potential for future growth. This can help investors achieve long-term capital appreciation.
What should be the investment strategy for the Nifty Next 50 Index Fund?
The Nifty Next 50 Index Fund’s investment strategy is straightforward: it seeks to duplicate the performance of the Nifty Next 50 Index. This is accomplished by making investments in the same proportion as the index in each of the 50 companies that make up the Nifty Next 50 Index. Over time, the investing approach doesn’t change, and the fund manager doesn’t make any adjustments to the portfolio. As a result, the investment performance, as mentioned above, will never outdo the index itself.
How does the Nifty Next 50’s performance stack up compared to the Nifty 100 and Nifty 50?
As all three of the Nifty indices — Nifty 100, Nifty 50, and Nifty Next 50 — are large-cap indices, an investor should anticipate somewhat similar performance from each. That’s not the case, though. The risk-reward landscape differs for each of the three large-cap indices. Although the performance of the Nifty 50 and Nifty 100 are quite similar, the Nifty Next 50 index stands out as having a higher risk and potential for larger returns.
What are the risks associated with investing in the Nifty Next 50 Index Fund?
Market risk: Because the Nifty Next 50 Index Fund is exposed to market risk, the value may decline if the state of the market as a whole worsens.
Company-specific risk: The Nifty Next 50 Index Fund is subject to company-specific risk because it has investments in a portfolio of 50 organisations. The performance of a specific company can have an adverse effect on the fund’s overall returns.
Currency risk: The Nifty Next 50 Index Fund is subject to currency risk. This means that variations in the exchange rate between the rupee and other currencies could have an impact on the fund’s value.
Political risk: The Nifty Next 50 Index Fund is also exposed to political risk. In other words, the value of an investment can be impacted by changes in government policies or political instability.
What are the factors for investors to consider before investing in the Nifty Next 50 Index Fund?
Risk tolerance: Purchasing shares of the Nifty Next 50 Index Fund entails assuming market, company-specific, and foreign exchange risks. Before investing in this fund, investors should evaluate their risk tolerance. When choosing the best investment plan, investors should also take into account their overall financial goals.
Investment horizon: When investing in the Nifty Next 50 Index Fund, it’s crucial to have a long-term time horizon. In order to take advantage of the potential for capital growth from this fund, investors must be willing to hold onto their investments for at least five years or longer.
Fund manager: Professional fund managers are in charge of overseeing the portfolio and making sure that it reflects the performance of the Nifty Next 50 Index. They are in charge of managing the Nifty Next 50 Index Fund. Before making an investment in a fund, investors should investigate the track record and investment philosophy of the fund management.
Diversification: The Nifty Next 50 Index Fund provides investors with exposure to a wide variety of companies from many sectors. This aids in lowering the investment portfolio’s total risk. To further cut risk, investors should still think about diversifying their holdings across several asset types, such as bonds and real estate.
Market conditions: Before making an investment in the fund, investors should do their homework on the state of the market and evaluate the risk and growth possibilities.
Expense ratio: It is crucial to take the Nifty Next 50 Index Fund’s expense ratio into account. This ratio, which indicates the annual management fees imposed by the fund manager, can significantly affect the fund’s overall results. Before choosing an index fund, investors should analyse the expense ratios of several options.
Investment objectives: It is important to align the investment objectives with the investment strategy. Investors should consider their investment goals and risk tolerance when determining the right investment strategy and consider the Nifty Next 50 Index Fund as one part of a well-diversified investment portfolio.
Should you invest in the Nifty Next 50 Index?
The Nifty Next 50 Index might experience periods of underperformance despite its advantages. In the years 2018, 2019, and 2020, the Nifty Next 50 Index was unable to outperform the Nifty 50 Index in terms of returns.
Therefore, it would be better for investors investing in the Nifty 100 Index to split their contributions between a Nifty 50 fund and a Nifty Next 50 Index fund.
Bottom line
Investing in the Nifty Next 50 Index Fund can be a smart investment option for those who are looking to diversify their portfolios and gain exposure to top companies in India. However, as with any investment, it is important to do thorough research and consider the factors mentioned above before making a decision.
Investors should, therefore, remember that every investment they make, whether it be in a Nifty 50 fund or a Nifty Next 50 scheme, must be tailored to meet their unique needs. It should be made in accordance with their risk appetite, income level, and investment needs.
Disclaimer: This blog has been issued on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. The information/data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions, figures, estimates and data included in this blog are as on date. The blog does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers shall be fully responsible/liable for any decision taken on the basis of this article.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
