Last Updated on August 22, 2022 at 11:15 pm
Frustration about varying active fund management and the need to shift funds has led to more and more investors considering index investment options. Although still a minority, it is definitely a healthy trend towards simpler portfolio management. A combination of Nifty + Nifty Next 50 index funds is a neat way to get large cap and mid cap exposure, but what is the right mix? An analysis.
Although SEBI has defined the top 100 stocks by free-float market cap as the “large cap universe”, we have repeatedly pointed out that Nifty Next 50 is NOT a large cap index! This is because of the large impact costs down the NIfty 100 ladder. See Warning! Even large cap stocks are not liquid enough! Can you handle this?
While we now have a Nifty 100 index fund – Axis Nifty 100 Index Fund Impressive AUM but is it expensive? – this is equivalent to adding 10%-20% of Nifty Next 50 to Nifty 50. See: Combine Nifty & Nifty Next 50 funds to create large, mid cap index portfolios
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Those who wish to add more of Nifty Next 50 or like the freedom to freely rebalance between the top and bottom halves of the Nifty 100 may prefer a two-fund combination.
As pointed out in Benjamin Graham’s 50% Stocks 50% Bonds strategy analysis, there cannot be an optimal mix when you add two asset classes. It is like adding red paint with white paint. The shade of desirable pink is personal.
Also, we have little history to study. A combined SIP in both indices can only be studied from Dec 2002. This just means 90 10-year rolling return data points.
If we compare a Nifty-only portfolio and a Nifty Next 50-only portfolio, notice that the NN50 has sometimes outperformed significantly, but that drops down to NIfty levels. It is amusing that a highly volatile index like NN50 has outperformed the N50 during the Feb-Mar 2020 market crash! That is an indication of how overvalued the Nifty was: Market crash destroys two-year imbalance among Index stocks
This should not be used as an indicator to go overboard on NN50 allocation. The portfolio drawdown is not shown here and a simple inspection of the NN50 price movement is enough to indicate that it can fall big.
It should be clear from the above date that gradually adding NN50 to N50 would only increase the returns for the time period studied (not indicative of future performance)
This is the relative volatility of 100% NN50 and 50% NN50 + 50% N50 portfolios compared with a Nifty-only portfolio. The monthly volatility over a 10-year period is measured.
The 100% NN50 portfolio has been almost 25% more volatile than a 100% N50 portfolio. Investing while adding NN50 should expect at least this excess volatility and can suitably weight it with their own exposure.
Please note that these portfolios have been rebalanced annually and associated taxes and loads are not factored in. Systematic rebalancing is crucial to reduce risk.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)