How Can You Make Investments in the NIFTY Next 50 Index (2024)

The popularity of passive funds is gaining in India. To capitalize on the same, fund houses are launching passive funds tracking various indices. A few fund houses have launched funds that track the NIFTY Next 50 index. This includes Axis Mutual Fund and Navi Mutual Fund, which launched Index Funds that track the NIFTY Next 50 Index in January 2022.

What’s more, there were already more than 10 index funds and exchange-traded funds (ETFs) from different fund houses that track the NIFTY Next 50 Index. This clearly shows how popular the index is.

In this blog, we will explain what the NIFTY Next 50 index is, its composition, and returns to help you understand if you should be investing in this large-cap index.

What Is The NIFTY Next 50 Index?

The NIFTY Next 50 Index, as the name suggests, is a diversified large-cap index that consists of the 50 large-cap companies that are not part of the NIFTY 50 Index. Therefore, its constituents are the companies ranked 51st to 100th as per the free-float market capitalization (shares available for trading in the market multiplied by share price).

Another way to look at this Index is to consider all the companies in the NIFTY 100 Index after excluding the companies that are part of the NIFTY 50 Index.

These companies are called Next 50 because they can become part of the NIFTY 50 Index at a later date if the stock performs well. Between January 2002 and March 2021, 52 stocks have been upgraded from the NIFTY Next 50 Index to the NIFTY 50 Index. The most recent ones include these:

On the other hand, if a NIFTY 50 stock performs poorly, it can be downgraded to the NIFTY Next 50 Index. For example, in March 2021, GAIL (Gas Authority of India Limited) was moved from the NIFTY 50 Index to the NIFTY Next 50 Index. At the same time, the Tata Consumer Products stock was moved to NIFTY 50 from NIFTY Next 50 keeping the number of stocks constant at 50 in both the indices.

What Are The Constituents Of The NIFTY Next 50 Index?

The weightage of the 50 stocks is decided by the free-float market cap of the stocks, therefore the weights are not equal. The below table shows the individual weights of the top 10 stocks (by individual weight) that are part of the index:

The individual weight of any single stock on this Index is capped at 4.5%. Moreover, the cumulative weight of these top 10 stocks accounts for around 34% of the index, which significantly reduces the concentration risk from a single stock for investors.

The NIFTY Next 50 is rebalanced on a bi-annual basis. So new companies may be included in the index by replacing existing companies twice a year based on average free-float market cap calculation with cutoff dates of 31 January and 31 July of each year. In the case of removal or introduction of stocks from the Index, a public announcement is made 4 weeks before the change comes into effect.

Being a diversified index and you can gain exposure to multiple sectors through a single investment. The top 10 sectors in which you can invest through this index are:

So, as of 31 December 2021, financial services stocks accounted for almost 20% of the Index. However, the index has significant exposure to other key sectors like consumer goods, metals, and consumer services, which makes it a well-diversified index. The weightage to particular sectors keeps on changing as per the performance of the stocks of respective sectors.

Returns From The NIFTY Next 50 Index

The NIFTY Next 50 Index has delivered SIP returns of 15.41% over the 15 year period. As you can see in the following graph, a SIP of Rs. 10,000 (total investment of Rs.18 lakh) over 15 years would have grown to a significantly larger Rs. 63.95 lakh. However, it is also clear from the following graph, the index has seen a surge in performance since the year 2014.

Comparison Of NIFTY Next 50 Index To NIFTY 50 Index

Now as mentioned earlier, the NIFTY Next 50 Index and NIFTY 50 Index are both large-cap indices that are part of the larger NIFTY 100 Index. However, there is a big difference in the size of the companies of the two indices.

As of 31 December 2021, the total market cap of companies in the NIFTY 50 Index was Rs. 134.54 lakh crore, while, the total market cap of NIFTY Next 50 Index companies was Rs. 37.25 lakh crore. So, if we have to do a relative comparison NIFTY 50 stocks account for 48% of the total market cap of NIFTY 100 index while NIFTY Next 50 accounts for just 23%.

The below table compares the year-on-year returns of the NIFTY 50 Index and NIFTY Next 50 Index:

As you can see from the above comparison, during bullish phases, the NIFTY Next 50 Index has in most cases managed to outperform the NIFTY 50 Index. However, during market drawdowns such as 2008, 2011, and 2015 the NIFTY Next 50 Index has posted significantly higher losses as compared to the NIFTY 50.

The outperformance of the NIFTY Next 50 Index vs the NIFTY 50 Index is also illustrated by comparing the rolling returns posted by the two indices over different time periods:

As you can see, irrespective of the time period chosen, the average rolling returns provided by the NIFTY Next 50 Index have exceeded those of the NIFTY 50 Index.

Nifty Next 50 Vs. Equity Funds With Emerging Bluechip Theme

There are a few funds whose names suggest that they also invest in companies that have the potential to become bluechip stocks. Two of these funds are– Canara Robeco Emerging Equities Fund and Mirae Asset Emerging Bluechip Fund.

The investment objective of Canara Robeco Emerging Equities Fund is to invest in high-growth companies both in the large and midcap space. Similarly, Mirae Assets Emerging Bluechip Fund also invests in a diversified portfolio of large and midcap companies.

As both of these funds invest in both Large and Midcap stocks, these funds can’t be treated as the active counterpart of NIFTY Next 50 index. Both of these funds have substantial exposure to midcap companies while NIFTY Next 50 is a purely large-cap index. As per SEBI definitions, Large & Midcap Funds have to mandatorily invest at least 35% of assets in large and mid-cap company stocks. However, comparing the performance of the Next 50 Index to these schemes can help us determine if the performance of this Index is at par with a combination of large cap and midcap stocks.

The following table shows the allocation of these two funds to large and midcap stocks:

This allocation to midcap stocks explained the outperformance of these funds over NIFTY Next 50 index as shown below:

How To Invest In The NIFTY Next 50 Index

A simple and easy way to invest in the NIFTY Next 50 Index is to choose an index fund or ETF that tracks this index. However, the limitation of taking exposure directly to NIFTY Next 50 is that your gains, as well as losses, will be in line with the Next 50 index. So, you will never be able to outperform the index. The smart way of investing in the NIFTY Next 50 Index while generating index-beating returns is to take ET Money Genius membership.

Genius strategies only provides exposure to portfolios that invest in index funds tracking the NIFTY Next 50 index but also various other indices including, Nifty 50, Nifty Midcap 150, and Nifty Smallcap 250, to provide multi-level diversification. Apart from this, each of the 6 Genius strategies will also have exposure to three other asset classes– international equities, gold, and debt. Genius doesn’t simply allocate money across asset classes, it follows a dynamic asset allocation approach which does intelligent investing to ensure you are invested in the right asset at the right time for right tenure. The multi-asset strategy with dynamic asset allocation enables Genius portfolios to capture the upside while at the same time providing excellent downside protection during market correction phases. This has helped Genius create alpha for its investors over long term.

This ability to time entry and exit into and from different asset classes has helped Genius portfolios beat even actively-managed equity funds with good margins over the long term. Therefore, if you don’t want to be satisfied with just index-like returns, invest in NIFTY Next 50 through Genius. If you want to know more about Genius portfolios, click here.