What is the best way to invest in Nifty Next 50 Index?

By now it should be no surprise to freefincal regulars that the Nifty Next 50 (NN50) has a fantastic (though volatile) track record and most actively managed mutual funds struggle to beat it. In fact, no active fund has NN50 as its benchmark. So this naturally draws the question, what is the best way to invest in the Nifty Next 50? Should I use an index fund or an ETF? Which is better? Let us find out.

First, what is NN50? If you arrange (in descending order) the stocks that trade at the NSE as per their free float market capitalization (that is the no of stock available for trading x current price) then the Nifty 50 has the top 50 stocks, NIfty next 50 has the next 50 stocks(!). Nifty 100 = Nifty 50 +Nifty next 50 and so. If you want an introduction Watch my talk on index investing: Can we get higher returns with lower risk?

Second, if you are hearing about the NN50 for the first time, do take some time to understand its speciality by reading these posts:(1) Evaluating the Nifty Next 50 as an Index Fund (2) Nifty Next 50: The Benchmark Index That No Mutual Fund Would Touch?! (3) Warning! Nifty Next 50 is NOT a large-cap index! (4) Are Nifty Smart Beta (strategic) Indices better than the Nifty Next 50? (5) Why we badly need a Midcap and Smallcap Index Fund – Performance Comparison with Nifty Midcap 100 & Nifty Next 50

Third, please recognise that the only the reason NN50 has performed well and has been so volatile is that its bottom 10 stocks are pretty much midcaps. So NN50 is large and midcap index fund. As the Indian stock market attains greater depths, that is more robust trading volumes, we should expect the NN50 to become more large-capish and the high returns seen in the past could well disappear.

Fourth, recognise that in the Nifty 50 and Nifty next 50, the stock with higher free-float market cap has the higher weight. So about 50% of the index will have about 7-8 stocks! This is a bit too much concentration! Instead of this, the NIfty 100 equal weight is an index that assigns equal exposure to all stocks. This will lower risk and often enhance rewards. The Nifty 100EW is a better option than the NN50 if we go by past performance – lower risk and similar reward. As on date, there are two index funds – one from Sundaram and one from Principal that track the NIfty 100 Equal-weight and both are now part of My Handpicked Mutual Funds September 2018 (PlumbLine)

Fifth, at the rate at which I moving towards index investing, soon there will be no more need for you to read freefincal 🙂

What is the best way to invest in Nifty Next 50 Index?

What are the current options to invest in Nifty Next 50 Index?

As on Sep 6th 2018, these are the list of index funds and ETFs that track the NN50.

  1. IDBI Nifty Junior Index Fund – Direct Plan
  2. Reliance ETF Junior BeES
  3. ICICI Prudential Nifty Next 50 Index Fund – Direct Plan
  4. ICICI Prudential Nifty Next 50 ETF
  5. UTI Nifty Next 50 Exchange Traded Fund
  6. UTI Nifty Next 50 Index Fund – Direct Plan
  7. SBI ETF Nifty Next 50 Fund
  8. SBI ETF Sensex Next 50

So out of these 8, let us quickly eliminate options.

SBI ETF Sensex Next 50 (NFO opened Sep 5th 2018). Verdict: Too soon, avoid

ICICI Prudential Nifty Next 50 ETF (Just started trading a few days ago) Verdict: Too soon, avoid

IDBI Nifty Junior Index Fund-Direct Plan. AUM as on 31sy July 2018 55.96 Crores. The expense ratio for the direct plan: 0.56%. Verdict aum is too low and the expense ratio is too high. Avoid. Source: fund factsheet

SBI ETF Nifty Next 50 Fund AUM is about 19 Crores (as per VR, the fund house factsheet link does not work!) and the expense ratio is 0.23%. Not let us look at how much the Price of the ETF unit varies from its NAV.

SBI ETF Nifty Next 50 Fund

I think that is a but much, especially those spikes. It does, however, hover about 0% and that is good. Price NAV differences are okay as long as they move on either side of 0%. Tbis means there is a good supply-demand resetting aided by authorized participants. As pointed out in Interested in ETFs? Here is how you can select ETFs by checking how easy it is buy/sell them – a low AUM ETF is by itself not a problem as long as the price-nav difference is not too high.

If we look at the recent price nav difference where each vertical bin is a week in size, notice that positive or negative differences do not last for more than a week or so. In this regard, this ETF is “okay”, but we can do better?. Verdict: OK, neutral

UTI Nifty Next 50 Exchange Traded Fund

Expense ration is .0222% and AUM as on July 31st 2018 is 52.43 Crores. Source: fund house If we look at the price-nav difference, there are prolonged periods when the price is either above or below NAV.Each vertical bin is a week. That is not a good sign. Verdict: Avoid

UTI Nifty Next 50 Exchange Traded Fund


ICICI Prudential Nifty Next 50 Index Fund-Direct Plan vs Reliance ETF Junior BeES

So let us now compare the well-established choices for NN50 tracking. By the way, the NN50 was known as NIfty Junior (Nifty = nifty senior). The Junior bees ETF is 15 years old and the ICICI index fund is 8 years old. We shall however only compare returns from Jan 2013 as we shall only consider the direct plan.

There is one important difference between an index fund and an ETF. If you look at the scheme document of Junior Bees,

The Scheme, in general, will hold all the Securities that comprise the underlying index in the same proportion as the index. The income received by way of Dividend shall be used for recurring expenses and Redemption requirements or shall be accumulated and invested as per the investment objective of the Scheme. There is a risk of higher Tracking Error due to the income received by way of Dividend till it is reinvested. Expectation is that, over a period of time, the Tracking Error of the Scheme relative to the performance of the underlying index will be relatively low.

The delay in reinvestment can be as much as one quarter from what I understand. Also according to Indiainfoline, the last dividend payout was on Nov 3rd 2014. The NAV used will ex-dividend. That is the divided will not be factored in

First, we compare the ICICI index fund NAV with the Reliance Junior Bees NAV (excluding the one dividend mentioned above). Technically this is wrong as we ETF returns should be calculated with its price as that is what we use for buying and selling. Of course to this the dividend also should be treated as reinvested (and this is not done)

Three years: Index fund NAV vs ETF NAV

Four years: Index fund NAV vs ETF NAV

Five years: Index fund NAV vs ETF NAV

So now let us use the ETF price. Notice now that the ETF even without taking into account the dividend fares much better.
Three years: Index fund NAV vs ETF Price

Four years: Index fund NAV vs ETF Price

Five years: Index fund NAV vs ETF Price

Reliance Junior Bees Verdict: Good choice for those who already have demat accounts (note that demat acct charges and brokerage have been excluded) and know how to place limit orders and can track and wait for nav-price to hit desirable levels

ICICI Nifty Next 50 Index fund Direct plan Verdict: If you compare with the ETF, the fund with even 0.44% expense ratio does reasonably well and is a good choice. The AUM as on 31st July is 250.36 crores.

UTI Nifty Next 50 Index Fund-Direct Plan AUM as on 31sy July 2018 227.65 Crores. The expense ratio for the direct plan: 0.27%. Verdict aum is pretty high for an index fund launched only in June! The expense ratio is pretty low. INVEST! Source: fund factsheet A big thank you to a reader who calls himself “Neo” for pointing this out

So these are clearly the best choices for tracking Nifty Next 50 index fund. Existing investos in either Junior Bees or ICICI NN50 index fund can continue happily. New investors could consider UTI index fund. If the UTI fund keeps its ER low, it has the potential to be the best choice among these.

Considering how frequently AMCs are churning up with index and ETFs, the landscape will change fast. I am now going to add both the UTI index fund and Junior Beest to My Handpicked Mutual Funds September 2018 (PlumbLine) Thank you “Neo”.



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8 thoughts on “What is the best way to invest in Nifty Next 50 Index?

  1. Beware of tracking error. I know from my own personal experience that some index funds (esp. from this fund house) can have terrible tracking error. In some cases, it can be as bad as 2 percentage points. The best way to identify and eliminate the tracking error is to wait for the fund to have some history.

  2. I don’t think I have ever seen you saying “Invest” as you did to UTI Nifty Next 50 index fund Professor.

    Thank you for the article.

  3. I can buy juniorbees on zerodha. Is it better to just buy 2-5 units per day and increase the units when the price falls?

  4. Thank you for this excellent analysis and your acknowledgement, Professor!
    I admire you for maintaining such a quantitative analysis blog, and making time to post almost daily, in spite of your full time job!
    Yes, we have to watch out for tracking error when comparing index funds.

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