Should You Invest in Nifty Next 50 Index Funds?

Are you looking to invest in future market leaders? Do you seek to diversify your portfolio beyond the top 50 stocks by market capitalisation in India? You may consider investing in Nifty Next 50 Index Funds. It is an index fund that tracks and replicates the Nifty Next 50 stock market index portfolio. Asset Management Companies or AMCs have launched Nifty Next 50 Index funds to help you diversify your portfolio beyond the top 50 stocks in India. Should you invest in Nifty Next 50 Index Funds? 

What are Nifty Next 50 Index Funds?

Nifty Next 50 Index Funds mirror the performance of the Nifty Next 50 index. It is a stock market index representing 50 companies from the Nifty 100 after keeping out the Nifty 50 companies. 

In simple terms, these are companies from 51-100 in terms of market capitalisation in India. Moreover, the Nifty Next 50 Index is rebalanced semiannually for exposure to new businesses within the broader sector. 

Should you invest in Nifty Next 50 Index Funds?

You may consider investing in Nifty Next 50 Index Funds if you seek exposure to future market leaders. It focuses on large-cap companies, which may soon become a part of the major stock market indices such as the Nifty 50. Moreover, you get stocks of these companies at a better valuation as they have yet to attain status as market leaders.

According to data, 75 stocks have graduated to become part of the Nifty 50 over 19 years. However, 51 of these stocks, which are now part of the Nifty 50, have graduated from the Nifty Next 50 index. 

Many investors consider Nifty 50 index funds as they track the top 50 stocks by market capitalisation in India. However, the Nifty 50 has a high weightage of around 36% towards financial services. It makes it vulnerable to nonperformance in this sector for some time.

The Nifty Next 50 is well diversified across metals, consumer goods and pharmaceuticals even though it has a weightage of around 19% towards financial services. For instance, the Nifty 50 index fund will perform well in a narrow or polarised market where only some sectors do well. However, the Nifty Next 50 Index Funds will do well when broader markets perform. 

You can invest in the Nifty Next 50 Index Funds to attain your financial goals only if it matches your risk tolerance. Otherwise, you may stick with Nifty 50 Index funds less volatile than Nifty Next 50 Index Funds. 

How has the Nifty Next 50 Index Performed?

The Nifty Next 50 Index has outperformed the Nifty 50 over ten years. However, the Nifty 50 has outperformed the Nifty Next 50 over a three and five-year timeframe. 

The Nifty Next 50 is more volatile as compared to the Nifty 50. However, studies have shown the Nifty Next 50 to be more resilient than the Nifty 50 in bear markets. One of the reasons for this could be the focus of the Nifty Next 50 on defensive sectors such as FMCG and pharmaceuticals. 

These sectors are a safe bet in a bear market. However, the Nifty 50 focuses on cyclical stocks such as financial services, which perform well during an economic rebound. 

The Nifty Next 50 focuses on emerging sectors and businesses of the future. It presents an excellent opportunity to diversify your portfolio beyond the traditional sectors. In a nutshell, it helps if you diversify your portfolio in Nifty 50 and Nifty Next 50 Index Funds depending on your risk profile. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in

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