In July 2016, while researching on the Nifty Smart Beta Indices, I accidentally realised that the Nifty Next 50 (formerly Nifty Jr) is one tough benchmark to beat. When I compiled the list of equity mutual fund benchmarks, I could not find any active mutual fund benchmarked to the Nifty Next 50! Now, if that is a fact, it is not hard to understand why. In this post, I present how mid-cap, small-cap, multi-cap and ELSS mutual funds have fared against the Nifty Next 50.
The Nifty Next 50 is the bottom 50 of the top 100 stocks by market capitalisation. The top 50 is part of the Nifty (or Nifty 50). It is indeed amusing why it is not easy to beat such a "simplistic" index composition.
I am indebted to Ankit Jain for spotting an error in the May 2017 outperformance sheet. This is the revised file: May 2017 Mutual Fund Outperformance Screener.
This time, I have used Nifty Next 50 as a benchmark for mid-caps, small-cap, multi-cap, ELSS, international funds and "others". This is a debatable decision as one can argue that it is not an appropriate index to compare. I agree.
Since the Nifty next 50 excludes the top 50 large cap stocks, I will not compare it with large cap funds. It is not fair in my opinion. I would peg the index as a multi-cap index and it is neither a mid-cap or small-cap index.
However, it is well known that mid-caps and small caps are quite volatile. If after such ups and downs they are not able to beat the Nifty Next 50 then it may not be worth investing in them (see below though). Same is true for international funds and the "others" category funds.
Now, those who recognise the importance of an asset allocation will understand that there is no need for ELSS funds for tax planning. A comparison with Nifty Next 50 should be another reason!
Here are some comparisons.
Nifty Next 50 (price index) vs BSE Small CAP (Total returns)
Nifty Next 50 (price index) vs BSE Mid-CAP (Total returns)
Nifty Next 50 (price index) vs Nifty Full Small CAP (price index)
Nifty Next 50 (price index) vs BSE 200 (Total returns)
While the above duration is not long enough to conclusively justify the use of Nifty Next 50, I think you would agree that it is not a bad choice.
I present below the outperformance consistency scores wrt Nifty Next 50. A score of 50% implies that the fund has obtained better returns than the index for half the periods compared. The periods here refer to every possible 3Y, 5Y, 7Y durations (rolling returns) between Apr (3rd) 2006 and May (2nd) 2017. For more details refer to: May 2017 Equity Mutual Fund Outperformance Screener
ELSS vs Nifty Next 50
MId-cap funds vs Nifty Next 50
Multi-cap Fund vs Nifty Next 50
Small Cap Funds vs Nifty Next 50
You can download the data set (link above) and make your analysis.
We may rejoice that "our fund" has comfortably beat the Nifty Next 50 as on date. However, that may not be case going forward. In any case, the point is that not even 1/3
In any case, the point is that very few funds have managed to beat the index over 5Y or 7Y periods. This is quite disturbing. Of course, I have considered the nifty Next 50 without considering associated index investing expenses. But the dividends also have been ignored. The point is, all things considered, the Nifty Next 50 index is a very good one to invest in, for long term goals.
Note: I have only considered returns, not risk. An active fund managers job is not to just produce returns, but to do so by minimising risk. If you consider the downside protection (how much the funds fell when the index fell), then many of the above funds have performed reasonably well. You can check this here: May 2017 Equity Mutual Fund Screener with SIP, Lump Sum Returns (1-9Y) & Capture Ratios
Therefore DO NOT abandon your actively managed mutual fund in favour of the Nifty Next 50 without understanding risks. It is a pretty volatile index.
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