Why Nifty 50 plus Nifty Next 50 not the same as Nifty 100 index? MintGenie explains

Updated: 24 Mar 2023, 01:16 PM IST

The Nifty 50 and Nifty Next 50 indices are not the same as the Nifty 100 index due to weight allocation differences, so investors should choose the index that best suits their risk appetite and investment goals.

Nifty100 is made up of exactly the same 100 stocks that are part of Nifty50 and Next50.

The Nifty Next50 index has been in the news lately due to its erstwhile high allocation to Adani group stocks (which were under huge selling pressure). Due to this, many passive investors who had Next50 index funds in their portfolios had their faith shaken a bit.

But is Nifty Next50 really needed in one’s portfolio? Or is just having a Nifty50-based index fund enough? And why is Nifty50 + Next50 not the same as Nifty100? We try to address these questions in this article.

As you know, the bellwether Nifty50 index is made up of the 50 largest stocks by market capitalization. Nifty Next50, on the other hand, has the next 50 largest companies by market cap, i.e., those ranked 51-100.

So on the face of it, 50 stocks of Nifty50 and the rest 50 stocks in Next50 together form the top-100 stocks by market cap.

But isn’t this the same as having the Nifty100 index which too has the top 100 stocks?

The answer is No. This may sound counterintuitive but let me explain.

No doubt Nifty100 is made up of exactly the same 100 stocks that are part of Nifty50 and Next50. But the difference is in the weight allocations of individual stocks. That is, the weight that the stocks have in say Nifty50, are not replicated in the larger Nifty100 index. Similarly, the weight of the same stocks in Next50 and Nifty100 will differ.

To put it very simply, the weights of stocks in Nifty100 will not be the exact sum of the weights of the same stocks in their individual indices Nifty50 and Nifty Next50.

More specifically,

  • If you look at the combined weights of Nifty50 stocks in the Nifty100 index, then it is almost 86%.
  • Meanwhile, the combined weight of all the Nifty Next50 stocks in index Nifty100 is just a small 13-14%.
  • The top 10 stocks of Nifty50 hold 51-52% weight in Nifty 100.
  • The top 10 stocks of Nifty Next50 hold 4% weight in Nifty 100.

This means that if you invest in Nifty100 index fund, then you are basically getting exposure to 86% Nifty50 index plus only 14% Next50 index. So if Nifty50 does well, then given its high weight in Nifty100, even Nifty100 will do well. But if Nifty Next50 does well and Nifty50 doesn’t, then the positive impact of Next50 will be very small on Nifty100 due to its small 13-14% weight.

So, all said and done, investing equally in Nifty50 and Nifty Next 50 is not the same as investing in just the Nifty 100 index. Now let’s see which is suitable for whom?

Which index to invest in?

  • If you want to keep things very simple and want to limit yourself to major largecap giant stocks, then simply choose Nifty50-based index funds.
  • While Nifty Next50 also technically qualifies as a large cap index (as SEBI says that the top 100 stocks are to be considered as large cap stocks), it behaves more like midcaps when it comes to volatility, churn and return profile. So the Nifty Next50 index should be invested only if you know these factors and are willing to digest them. If not, it is better to avoid the Nifty Next50 fund even though it has high-risk-high-return potential.
  • And those who want a large exposure to Nifty50 and also want a small allocation to Nifty Next 50, can consider simply investing in Nifty 100 index-based funds.

    Dev Ashish is a SEBI-Registered Investment Advisor and Founder (Stable Investor). He provides fee-only financial planning and investment advisory services to small and HNI clients across India.

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First Published: 24 Mar 2023, 11:16 AM IST