Q. I am a 42-year-old IT professional, currently working in Pune. I have been investing in Sensex-tracking mutual funds for the past 15 years. I now intend to diversify and invest in other index mutual funds too. I have been advised by an acquaintance to invest in a mutual fund tracking Nifty Next 50 Index. Can you please elaborate on what Nifty Next 50 Index Fund is and how it is different from Nifty 50 Index? Please also elaborate on the advantages of investing in a mutual fund tracking Nifty Next 50 index.
The Nifty Next 50 index is a stock market index that tracks the performance of the 50 companies that are part of the Nifty 100 but are not part of Nifty 50 Index. In simple terms, it tracks the performance of 50 NSE-listed companies which rank 51st to 100th.
The Nifty Next 50 index was launched by the National Stock Exchange (NSE) in 1996 as a part of the Nifty family of indices. The Nifty Next 50 index is also known as the Junior Nifty.
The Nifty Next 50 index is designed to capture the growth potential of emerging companies in India that have the potential to become the leaders of tomorrow. The Nifty Next 50 index represents about 10% of the total market capitalization of the NSE and covers various sectors such as banking, consumer goods, pharmaceuticals, IT, metals, etc. The Nifty Next 50 index is rebalanced twice a year, in March and September, based on the latest market capitalization data.
The Nifty Next 50 index historically has been one of the best-performing indices in India over the long term, however in the past 5 years it has underperformed when compared to Nifty and Sensex. The Nifty Next 50 index has delivered a return of 39.99% in the past 5 years, compared to 71.65% for the Nifty 50 index and 76.75% for the Sensex. The Nifty Next 50 index offers investors an opportunity to invest in the future leaders of the Indian economy and benefit from their growth potential.
However, investing in the Nifty Next 50 index also involves higher risks and volatility than investing in the Nifty 50 index, as the companies in the Nifty Next 50 index are more sensitive to economic cycles, competitive pressures, regulatory changes, etc. Therefore, investors should have a long-term horizon and a high-risk appetite when investing in the Nifty Next 50 index.
Difference between Nifty 50 and Nifty Next 50
The main difference between nifty 50 and nifty next 50 is the size and liquidity of the companies that constitute them. Nifty 50 consists of large-cap companies that are well-established, widely traded and have high market capitalization.
Nifty next 50 consists of mid-cap companies that are relatively smaller, less traded and have lower market capitalization. As a result, nifty 50 tends to be more stable and less volatile than nifty next 50, but also offers lower growth potential and diversification benefits.
Another difference between Nifty 50 and Nifty next 50 is the sectoral composition and concentration of the indices. Nifty 50 is dominated by a few sectors such as financial services, information technology, energy and consumer goods, which account for more than 70% of its weightage. Nifty next 50 has a more balanced sectoral distribution, with sectors such as healthcare, industrials, utilities and materials having significant representation.
Nifty 50 also has a higher concentration of a few companies, such as Reliance Industries, HDFC Bank, Infosys and TCS, which together make up more than 40% of its weightage. Nifty next 50 has a lower concentration of any single company, with the top five companies accounting for less than 20% of its weightage.
The differences between Nifty 50 and Nifty Next 50 have implications for investors who want to invest in the Indian equity market through mutual funds or ETFs. Depending on their risk appetite, return expectations, investment horizon and diversification needs, they can choose between funds that track either index or a combination of both. Generally speaking, funds that track nifty 50 are suitable for investors who prefer stability, consistency and lower risk over higher returns.
Advantages of investing in Nifty Next 50
Below are the key advantages of investing in Nifty Next 50 Index
Diversification: A mutual fund tracking Nifty Next 50 index invests in 50 companies across various sectors and industries, which reduces the risk of concentration and volatility. By investing in a single fund, investors can gain access to a diversified portfolio of stocks that represent the growth potential of the Indian economy.
Low cost: A mutual fund tracking Nifty Next 50 index is a passive fund that replicates the performance of the underlying index. This means that the fund does not incur high expenses for active management, research, or trading. The fund charges a low expense ratio, which enhances the returns for investors.
Liquidity: A mutual fund tracking nifty next 50 index is traded on the stock exchange like any other mutual fund. Investors can buy or sell units of the fund at any time, without any lock-in period or exit load. This provides flexibility and convenience to investors who want to enter or exit the market as per their needs.
Tax efficiency: A mutual fund tracking Nifty Next 50 index is classified as an equity-oriented fund for tax purposes. This means that the long-term capital gains (LTCG) from the fund are taxed at 10% (plus surcharge and cess) if they exceed Rs. 1 lakh in a financial year. The short-term capital gains (STCG) are taxed at 15% (plus surcharge and cess). These rates are lower than the tax rates applicable to debt funds or fixed income instruments.
In conclusion, the Nifty Next 50 index is an important indicator of the performance and potential of the Indian equity market beyond the top 50 companies. Investing in a mutual fund that tracks this index can offer both opportunities and challenges for investors who are looking for growth and diversification in their portfolios.
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Note: This is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.