Nifty vs Nifty Next 50 Index Funds: Which to choose?

If you are into passive investing (via index funds and ETFs) in India, then you would know about the Nifty Next 50 index. But how does Nifty Next 50 differ from Nifty 50, how should you choose between Nifty 50 Vs Nifty Next 50 index funds, and how to go about investing in Nifty Next 50, are some of the things that we shall discuss in this post.

We try to compare the two popular indices of Nifty 50 and Nifty Next 50 (just like we did with Sensex Vs Nifty index funds) and come out with some answers to the debate of Nifty vs. Nifty Next 50 and also, try to assess if Is Nifty Next 50 better index than Nifty 50?

So let’s move on.

But first things first.

What is Nifty Next 50?

The index Nifty Next 50 represents 50 companies from Nifty 100 after excluding the first Nifty 50 companies. Nifty Next 50 was earlier called as Nifty Junior index.

In a way, you can say that Nifty 50 + Nifty Next 50 = Nifty 100.

Or you can also represent the relation between Nifty 50 and Nifty Next 50 as –

  • The Top 50 companies constitute Nifty 50.
  • While the next 51 to 100 companies make up Next-Nifty 50.

Since there are several Nifty indices out there (and you read about all of them here at All Nifty Indexes Explained), below is the position of Nifty and Next 50 indices in the overall hierarchy.

Nifty and Next 50

It is also worth mentioning that as per SEBI’s new categorization of stocks into Large Vs. Mid Vs. Small Cap stocks, the top 100 stocks as per market caps identified as large-cap stocks. So these 100 large-cap stocks in themselves make up Nifty 50 (first made up of 50 stocks) and Nifty Next 50 (made up of the next 50 stocks, i.e. from 51 to 100).

Depending on how a stock performs in both the indices and what the index management committee decides periodically, stocks keep moving occasionally from Nifty to the Next 50 index and vice versa. Stocks doing well in Next 50 graduate to Nifty 50 while those in Nifty that aren’t doing so well are kicked back to Next 50 index.

So to summarize what is the difference between Nifty 50 and Nifty Next 50, the answer is that Nifty 50 list consists of the 50 largest companies while the Nifty Next 50 list contains the next 50 big companies (i.e. from 51st to 100th largest companies by market capitalization).

Nifty 50 Vs. Nifty Next 50: Portfolio & Structural Differences

 This is very important to understand if you are a passive index investor. Since both are indexes, many investors assume that are similar and behave in a similar manner. Another reason for this flawed belief is that since both are made up of so-called large-cap stocks (first 50 in Nifty and next 50 in Nifty Next 50), they are basically large-cap indices. But that is not true at all. Even though stocks in both qualify as large-caps as per SEBI definitions, the average size of a Nifty 50 stock is much larger than the average size of a Nifty Next 50 stock. And this leads to some major fundamental differences between the two indices.

Nifty 50 index is made up of pure large-cap stocks and it predictably behaves like a large-cap index. But inspite of being made of large-cap stocks (from 51 to 100), the index of Nifty Next 50 doesn’t exactly behave like a large-cap index! It behaves more like a large & mid-cap index. Or if you want to call it, like a large-cap index with a mid-cap bias. And at many times, it even behaves like a mid-cap index. I am talking here from an index movement (and returns) perspective.

Talking about the sectoral composition or stock level concentration, there are some differences between the two index.

Here is the latest sectoral composition of Nifty 50 (in March 2021):

Nifty 50 Sectoral Composition March 2021

And here is the latest sectoral composition of Nifty Next 50 (in March 2021):

Nifty Next 50 Sectoral Composition March 2021

Clearly, Nifty Next 50 is more diversified and less concentrated towards any one sector. Stocks in Nifty Next 50 are more evenly distributed across sectors than they are Nifty50. Nifty 50 on the other hand is heavily skewed towards the top 2-3 sectors. This is one of the problems of Nifty 50 as I have already written in detail about Concentration Risk in Nifty 50 some time back. And this is the reason why investors who want to use index funds instead of large cap funds must be a bit careful about.

So that was about Nifty 50 and Nifty Next 50 sectoral distributions. You read more about the latest sectoral composition here – Nifty 50 and Nifty Next 50 on NSE’s website.

Nifty 50 Vs. Nifty Next 50: Return Comparison

As an investor, you would primarily be concerned about the returns your funds are giving you. So let’s compare returns of Nifty 50 vs Nifty Next 50.

Of course past performance is no guarantee of future returns, but looking at historical point-to-point data, the Nifty Next 50 seems to have an upper hand here. Even looking at rolling returns data, it’s Nifty Next 50 that does better in comparison with Nifty 50.

One reason for this might be that since Nifty Next 50 is made up of comparatively smaller stocks (commonly called mid-cap stocks) and this part of the market has done better than pure large caps in the last several years, the Next 50 has been able to deliver a better performance than Nifty 50.

But this better return profile of Nifty Next 50 comes with higher volatility. The Next 50 is much more volatile than the Nifty 50. The highs and lows of Nifty Next 50 have been much steeper than that of Nifty 50, or even the Nifty 100 till now.

The mid-caps tend to fly higher than large-caps during bull markets. But they also crash much more during corrections. So given that Next 50 is made up of smaller stocks, it is much more volatile than Nifty 50.

So Nifty Next 50 has provided higher returns with higher volatility till now. This may be suitable for some (aggressive) type of investors but not for all types (like conservative ones). So at least for aggressive investors, the Nifty Next 50 can be a useful option to increase the potential for higher portfolio returns.

Please note that I am not saying that Nifty Next 50 is a better Index than the Nifty 50. I am just saying that looking at the return-risk-volatility profile of the index, it might be suited for some types of investors. And remember that just because Nifty Next 50 has done better than Nifty 50 in past doesn’t mean that this will be repeated in future too.

Also instead of choosing between Nifty and Next 50, one can also use a mix of Nifty 50 and Nifty Next 50 index funds.

So that was about Nifty Next 50 vs Nifty 50 returns (2021).

Mixing Nifty 50 + Nifty Next 50?

As an investor, if you want to invest in the top 100 companies of India, then you can combine the Nifty 50 index fund and the Nifty Next 50 Index fund. This is one very simple way to have good exposure to large-cap and mid-cap companies.

Now, what should be the ratio of this mix?

It can be equal to start with. That is equal amounts in Nifty 50 and Nifty Next 50. But if someone wants a portfolio that is large-cap heavy, then it needs to have more of Nifty 50. While someone who is more aggressive and wants higher weightage to mid-caps, then they need to have more of Nifty Next 50.

Here are some possible combinations of Nifty (N50) and Nifty Next 50 (NN50) index funds:

  • 50% Nifty 50 + 50% Nifty Next 50
  • 60% Nifty 50 + 40% Nifty Next 50
  • 70% Nifty 50 + 30% Nifty Next 50
  • 40% Nifty 50 + 60% Nifty Next 50
  • 30% Nifty 50 + 70% Nifty Next 50

So for long-term goals that require significant equity component (like retirement financial planning), one can use two index funds by combining Nifty 50 and Nifty Next 50 index funds in a suitable ratio.

Now you may ask that instead of investing in two different index funds for Nifty and Nifty Next 50, wouldn’t it be better to simply invest in one index fund that combines both indexes – something like the Nifty 100 index fund? After all Nifty 100 is made up of Nifty 50 plus Nifty Next 50.

Theoretically yes. But practically no.

Even though Nifty 100 index is made up of all the stocks that are there in the two indices, i.e. Nifty 50 and Nifty Next 50, it is not that simple a comparison. Investing in Nifty 50 and Nifty Next 50 is not the same as investing in Nifty 100.

This might sound surprising, but let me explain it a bit.

Remember that all three indices, i.e. Nifty 50, Nifty Next 50 and Nifty 100 are market cap-weighted indices.

And due to the approach towards index construction and difference in stock weights, the weights of stocks in Nifty 100 will not be the sum of weights of these stocks in Nifty 50 and Nifty Next 50 combined.

So if you were to try to find the weight of only Nifty 50 stocks in the index Nifty 100, you will find that these 50 stocks of Nifty50 hold almost 86-87% of the weightage in Nifty100. The remaining 13-14% is held by the 50 stocks that are part of Nifty Next 50.

It is not an equal distribution of weightages between Nifty and Next 50 in the combined index Nifty 100.

So if instead of separately investing in both Nifty50 and Next50 index funds, you decide to go with Nifty 100 index funds, then it actually means that you are investing about 85% in Nifty50 and only 15% in Nifty Next 50.

Another interesting observation is that top-10 stocks of Nifty 50 form 52-53% of Nifty 100 weightage. But the top-10 stocks of Next50 only form less than 5% of the Nifty 100 weightage

This essentially means that if the stocks of Nifty 50 do well, even the Nifty 100 will do very well is primarily weight-loaded with (weightage-wise) Nifty 50 stocks. But if Nifty Next 50 does well, it will have a very small impact on the Nifty 100’s performance as the Next 50 stocks account for a much smaller weight in the Nifty 100.

So this means that the returns of a combination of Nifty 50 + Nifty Next 50 (index funds) will not be the same as that of Nifty 100 index (or index fund).

Now you know a very important aspect of Nifty 50 vs Nifty Next 50 vs Nifty 100. And you must also have understood by now that in the Nifty 50 vs Nifty 100 comparison, it’s primarily the Nifty 50 that makes up the bulk of Nifty 100. Nifty Next 50 only has a very small weightage in Nifty 100’s composition.

Moving on…

How to invest in Nifty Next 50 index?

You have two options to do so. You can invest through a Nifty Next 50 index fund or a Next 50 ETF (exchange-traded fund). There are several index funds in India. The ones that are based on Nifty Next 50 are listed below:

  • ICICI Prudential Nifty Next 50 Index Fund
  • UTI Nifty Next 50 Index Fund
  • IDBI Nifty Junior Index Fund
  • L&T Nifty Next 50 Index Fund
  • DSP NIFTY Next 50 Index Fund
  • Motilal Oswal Nifty Next 50 Index Fund

So if you are looking for which is the best Nifty Next 50 Index Fund, then you will have to pick one from the above-listed index funds. Or you can go for Nifty Next 50 ETFs as well.

Now you may have questions like:

Should I invest in Nifty Next 50 index fund?

Or

Is it advisable to invest in Nifty Next 50 Index Fund for the long term? 

Or

Should I invest in Nifty Next 50 instead of Nifty 50?

Every index fund has a different return and risk profile and hence is suitable for different kinds of investors. So if it’s about simply investing in large/mega caps of India, then picking a Nifty 50 index fund is better (assuming you are not looking for active large-cap funds). But if you want to invest in both mega-caps and large/mid-caps, then investing in both the Nifty 50 index fund and Nifty Next 50 index fund is the way to go. The ratio between the two will depend on where you want to focus more. We have seen that the Nifty 100 index fund isn’t exactly equal to the sum of Nifty 50 and Nifty Next 50. But even that can be a good option for getting large-cap exposure with sprinklings of mid-caps.

But if you want to pick index funds for your mutual fund portfolio, make sure to also consider active fund in other categories like Flexi-cap funds, multi-cap funds, mid-cap funds, etc. so that your index fund choice complements (and not overlaps) with the other existing funds in your MF portfolio.

If you are confused between choosing the right large-cap funds or picking the optimal index funds instead, then you can consider Stable Model Mutual Funds. A premium subscription service that provides you with instant access to a ready-to-use list of investment-worthy Equity& Debt Mutual Funds. The fund recommendations are monitored and reviewed on an ongoing basis (and you are updated once every quarter), so you can rest assured that you can continue to remain invested in good funds. If you wish to pick the right funds for your MF portfolio, then you can SUBSCRIBE Here.

So that was about the difference between Nifty 50 Vs. Nifty Next 50. If you want and it suits your requirement, then both Nifty 50 index funds and Nifty Next 50 index funds can be part of your mutual fund portfolio.

So whether should I invest in Nifty Next 50 fund, will depend on whether it’s a good portfolio fit for you. As for the question of how to invest in nifty next 50, the answer is via Nifty Next 50 index funds and ETFs. That is all about Nifty Next 50 index investing in India (2021). I hope you found this comparison of Nifty Next 50 vs. Nifty 50 useful.

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